PUBLIC SERVICE ELECTRIC & GAS CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
- ----------- --------------------------------------------- ------------------

1-9120 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 22-2625848
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 1171
Newark, New Jersey 07101-1171
201 430-7000
http://www.pseg.com

Securities registered pursuant to Section 12 (b) of the Act:

Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock without par value New York Stock Exchange
Philadelphia Stock Exchange

1-973 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 22-1212800
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 570
Newark, New Jersey 07101-0570
201 430-7000

DOCUMENTS INCORPORATED BY REFERENCE

Part of Form 10-K Documents Incorporated by Reference
- ----------------- -----------------------------------
III Portions of the definitive Proxy Statement for
the Annual Meeting of Stockholders of Public
Service Enterprise Group Incorporated to be held
April 15, 1997, which definitive Proxy Statement
is expected to be filed with the Securities and
Exchange Commission on or about March 3, 1997, as
specified herein.

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Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class Title of Each Class on Which Registered
- ---------------------- --------------------- ----------------------
Cumulative Preferred First and Refunding
Stock Mortgage
$100 par value Series: Bonds Series Due:
4.08% 83/4% Z 1999
4.18% 91/8% BB 2005
4.30% 91/4% CC 2021
5.05% 87/8% DD 2003
5.28% 77/8% FF 2001
5.97% 71/8% GG 1997
6.80% 75/8% II 2000
7.44% 67/8% KK 1997
81/2% LL 2022
67/8% MM 2003
6 % NN 1998 New York Stock Exchange
71/2% OO 2023
$25 par value Series: 61/2% PP 2004
6.75% 6 % QQ 2000
61/8% RR 2002
7 % SS 2024
: 73/8% TT 2014
63/4% UU 2006
63/4% VV 2016
61/4% WW 2007
8 % 2037
5 % 2037

Monthly Income Preferred Securities (Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures), $25 par value at 9.375%, $25 par
value at 8.00%, issued by Public Service Electric and Gas Capital, L.P.
(Registrant) and registered on the New York Stock Exchange.

Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures), $25 par value at 8.625%, issued by
PSE&G Capital Trust I (Registrant) and registered on the New York Stock
Exchange.

Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures),$25 par value at 8.125%, issued by
PSE&G Capital Trust II (Registrant) and registered on the New York Stock
Exchange.

Securities registered pursuant to Section 12(g) of the Act:

Registrant Title of Class
---------- --------------
Public Service Enterprise Group Incorporated None
Public Service Electric and Gas Company 6.92% Cumulative Preferred Stock
$100 par value Medium-Term Notes,
Series A

Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes X No .

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

The aggregate market value of the Common Stock of Public Service Enterprise
Group Incorporated held by non-affiliates as of January 31, 1997 was
$6,344,796,578 based upon the New York Stock Exchange Composite Transaction
closing price.

The number of shares outstanding of Enterprise's sole class of common
stock, as of the latest practicable date, was as follows:

Class Outstanding at January 31, 1997
----- -------------------------------
Common Stock, without par value 231,957,608

As of January 31, 1997, Public Service Electric and Gas Company had issued
and outstanding 132,450,344 shares of Common Stock, without nominal or par
value, all of which were privately held, beneficially and of record by Public
Service Enterprise Group Incorporated.

TABLE OF CONTENTS

Page
----
Table of Contents....................................................
Glossary of Terms....................................................

PART I

Item 1. Business................................................
General.................................................
Enterprise..............................................
PSE&G...................................................
Industry Issues.........................................
Segment Information.....................................
Competitive Environment.................................
Construction and Capital Requirements...................
Financing Activities....................................
Federal Income Taxes....................................
Credit Ratings..........................................
PSE&G...................................................
Rate Matters............................................
Customers...............................................
Integrated Resource Plan................................
Pennsylvania--New Jersey--Maryland Interconnection......
Power Purchases.........................................
Demand Side Management..................................
Electric Generating Capacity............................
Nuclear Operations......................................
Electric Fuel Supply and Disposal.......................
Low Level Radioactive Waste.............................
Gas Operations and Supply...............................
Employee Relations......................................
Environmental Controls..................................
EDHI....................................................
Item 2. Properties..............................................
Item 3. Legal Proceedings.......................................
Item 4. Submission of Matters to a Vote of Security Holders.....

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................
Item 6. Selected Financial Data.................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................
Enterprise..............................................
Corporate Structure.....................................
Overview of 1996........................................
Results of Operations...................................
Liquidity and Capital Resources.........................
Nuclear Operations......................................
Competitive Environment.................................
Accounting Issues.......................................
Rate Matters............................................
Site Restorations and Other Environmental Costs.........
Future Outlook..........................................
PSE&G...................................................
Forward Looking Statements..............................

Page
----
Item 8. Financial Statements and Supplementary Data..............
Consolidated Statements of Income (Enterprise)...........
Consolidated Balance Sheets (Enterprise).................
Consolidated Statements of Cash Flows (Enterprise).......
Consolidated Statements of Retained Earnings
(Enterprise)...........................................
Consolidated Statements of Income (PSE&G)................
Consolidated Balance Sheets (PSE&G)......................
Consolidated Statements of Cash Flows (PSE&G)............
Consolidated Statements of Retained Earnings (PSE&G).....
Notes to Consolidated Financial Statements (Enterprise)..
Notes to Consolidated Financial Statements (PSE&G).......
Financial Statement Responsibility (Enterprise)..........
Financial Statement Responsibility (PSE&G)...............
Independent Auditors' Report (Enterprise)................
Independent Auditors' Report (PSE&G).....................
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure....................
PART III

Item 10. Directors and Executive Officers of the Registrants......
Directors of the Registrants.............................
Enterprise...............................................
PSE&G....................................................
Executive Officers of the Registrants....................
Item 11. Executive Compensation...................................
Enterprise...............................................
PSE&G....................................................
Summary Compensation Table...............................
Option Grants in Last Fiscal Year (1996).................
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values (12/31/96)...............
Employment Contracts and Arrangements....................
Compensation Committee Interlocks and Insider
Participation..........................................
Compensation of Directors and Certain Business
Relationships..........................................
Compensation Pursuant to Pension Plans...................
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................
Enterprise...............................................
PSE&G....................................................
Item 13. Certain Relationships and Related Transactions...........
Enterprise...............................................
PSE&G....................................................
PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...............................................
Schedule II--Valuation and Qualifying Accounts
(Enterprise)...........................................
Schedule II--Valuation and Qualifying Accounts (PSE&G)...
Signatures--Public Service Enterprise Group Incorporated.
Signatures--Public Service Electric and Gas Company......
Exhibit Index............................................
Enterprise...............................................
PSE&G....................................................

GLOSSARY TERMS

The following is a glossary of frequently used abbreviations or acronyms that
are found in this report:

Term Meaning
---- -------

ACE.............................. Atlantic City Electric Company
AFDC............................. Allowance for Funds used During Construction
AMT.............................. Alternative Minimum Tax
Bonds............................ First and Refunding Mortgage Bonds
BPU.............................. New Jersey Board of Public Utilities
BWR.............................. Boiling Water Reactor
CAA.............................. Federal Clean Air Act
Capital.......................... PSEG Capital Corporation
CEA.............................. Community Energy Alternatives Incorporated
CEA USA.......................... CEA USA, Incorporated
CEA New Jersey................... CEA New Jersey, Incorporated
CERCLA........................... Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980
Certificate of Need.............. Certificate of Need under the NJNAA
CTC.............................. Competitive Transition Charge
DOE.............................. U.S. Department of Energy
Draft Phase II Report............ Draft Phase II Report of The New Jersey
Energy Master Plan
DP&L............................. Delmarva Power & Light Company
DRBC............................. Delaware River Basin Commission
DSM.............................. Demand Side Management
Eagle Point...................... CEA Eagle Point, Incorporated
EBIT............................. Earnings before interest and taxes
EDC.............................. Energy Development Corporation
EDHI............................. Enterprise Diversified Holdings Incorporated
EGDC............................. Enterprise Group Development Corporation
EITF............................. FASB's Emerging Issues Task Force
Enterprise....................... Public Service Enterprise Group Incorporated
EPA.............................. U.S. Environmental Protection Agency
EPAct............................ National Energy Policy Act of 1992
ERI.............................. Energis Resources Incorporated
EWGs............................. Exempt Wholesale Generators
FASB............................. Financial Accounting Standards Board
Fault Act........................ New Jersey Public Utility Accident Fault
Determination Act
FERC............................. Federal Energy Regulatory Commission
Fuelco........................... PSE&G Fuel Corporation
Funding.......................... Enterprise Capital Funding Corporation
FWPCA............................ Federal Water Pollution Control Act
GE............................... General Electric Company

Term Meaning
---- -------

Hope Creek....................... Hope Creek Nuclear Generating Station
IPP.............................. Independent Power Producers
IRP.............................. Integrated Resource Plan
IRS.............................. Internal Revenue Service
ISO.............................. Independent System Operator
KWH.............................. Kilowatt-hours
LEAC............................. Electric Levelized Energy Adjustment Clause
LGAC............................. Levelized Gas Adjustment Charge
LNG.............................. Liquefied Natural Gas
LTIP............................. Long-Term Incentive Plan
MD&A............................. Management's Discussion and Analysis of
Financial Condition and Results of Operations
MICP............................. Management Incentive Compensation Plan
MOA.............................. Memorandum of Agreement
Mortgage......................... First and Refunding Mortgage of PSE&G
MTNs............................. Medium-Term Notes
MW............................... Megawatts
MWH.............................. Megawatt-hours
NAAQS............................ National Ambient Air Quality Standards
NEIL............................. Nuclear Electric Insurance Limited
NJAPCC........................... New Jersey Air Pollution Control Code
NJDEP............................ New Jersey Department of Environmental
Protection
NJGRT............................ New Jersey Gross Receipts and Franchise Tax
NJNAA............................ New Jersey Need Assessment Act
NJPDES........................... New Jersey Pollution Discharge Elimination
System
NML.............................. Nuclear Mutual Limited
NOV.............................. Notice of Violation
NOx.............................. Nitrogen Oxides
Notes............................ Notes to Consolidated Financial Statements
NPDES............................ National Pollutant Discharge Elimination
System
NPS.............................. The BPU's nuclear performance standard
established for nuclear generating stations
owned by New Jersey electric utilities
NRC.............................. Nuclear Regulatory Commission
NUGs............................. Non-utility Generators
NWPA............................. Nuclear Waste Policy Act of 1982, as amended
OPEB............................. Other Postretirement Benefits
OTAG............................. Ozone Transport Assessment Group
Peach Bottom..................... Peach Bottom Atomic Power Station, Units 2
and 3
PECO............................. PECO Energy Company
PJM.............................. Pennsylvania--New Jersey--Maryland
Interconnection
PPUC............................. Pennsylvania Public Utility Commission

Term Meaning
---- -------

Price Anderson................... Price-Anderson liability provisions of the
Atomic Energy Act of 1954, as amended
PRPs............................. Potentially Responsible Parties
PSE&G............................ Public Service Electric and Gas Company
PSCRC............................ Public Service Conservation Resources
Corporation
PSRC............................. Public Service Resources Corporation
PUHCA............................ Public Utility Holding Company Act of 1935
PWR.............................. Pressurized Water Reactor
QFs.............................. Qualifying Facilities
RAC.............................. Remediation Adjustment Charge
RCRA............................. Federal Resource Conservation and Recovery
Act of 1976
Remediation Program.............. PSE&G Gas Plant Remediation Program
RI............................... Remedial Investigation
RI/FS............................ Remedial Investigation and Feasibility Study
ROD.............................. Record of Decision
Salem............................ Salem Nuclear Generating Station, Units 1
and 2
SALP............................. Systematic Assessment of Licensee Performance
SEC.............................. Securities and Exchange Commission
SFAS 71.......................... Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of
Certain Types of Regulation"
SFAS 106......................... Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions"
SFAS 109......................... Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes"
SFAS 121......................... Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets
to be Disposed Of"
SFAS 123......................... Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based
Compensation"
S02.............................. Sulfur Dioxide
Spill Act........................ New Jersey Spill Compensation and Control Act

PART I

Item 1. Business

General

Enterprise

Public Service Enterprise Group Incorporated (Enterprise), incorporated
under the laws of the State of New Jersey with its principal executive offices
located at 80 Park Plaza, Newark, New Jersey 07101, is a public utility holding
company that neither owns nor operates any physical properties. Enterprise has
two direct, wholly-owned subsidiaries, Public Service Electric and Gas Company
(PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's
principal subsidiary, PSE&G, is an operating public utility providing electric
and gas service in certain areas of the State of New Jersey. EDHI is the parent
of Enterprise's non-utility businesses: Community Energy Alternatives
Incorporated (CEA), Public Service Resources Corporation (PSRC), Energis
Resources Incorporated (ERI), Enterprise Group Development Corporation (EGDC),
PSEG Capital Corporation (Capital) and Enterprise Capital Funding Corporation
(Funding). For additional information on EDHI and its subsidiaries, see EDHI.
EDHI sold Energy Development Corporation (EDC) in 1996. See Note 2--Discontinued
Operations of Notes to Consolidated Financial Statements (Notes).

PSE&G

PSE&G, a New Jersey corporation with its principal executive offices at 80
Park Plaza, Newark, New Jersey 07101, is an operating public utility company
engaged principally in the generation, transmission, distribution and sale of
electric energy service and in the transmission, distribution and sale of gas
service in New Jersey. PSE&G supplies electric and gas service in areas of New
Jersey in which approximately 5.5 million persons, about 70% of the State's
population, reside. PSE&G's electric and gas service area is a corridor of
approximately 2,600 square miles running diagonally across New Jersey from
Bergen County in the northeast to an area below the City of Camden in the
southwest. The greater portion of this area is served with both electricity and
gas, but some parts are served with electricity only and other parts with gas
only. This heavily populated, commercialized and industrialized territory
encompasses most of New Jersey's largest municipalities, including its six
largest cities--Newark, Jersey City, Paterson, Elizabeth, Trenton and Camden--in
addition to approximately 300 suburban and rural communities. This service
territory contains a diversified mix of commerce and industry, including major
facilities of many corporations of national prominence. PSE&G believes that it
has all the franchises (including consents) necessary for its electric and gas
operations in the territory it serves. Such franchise rights are not exclusive.

Under the general laws of New Jersey, PSE&G has the right to use the public
highways, streets and alleys in New Jersey for erecting, laying and maintaining
poles, conduits and wires necessary for its electric operations. PSE&G must,
however, first obtain the consent in writing of the owners of the soil for the
purpose of erecting poles. PSE&G's rights are also subject to regulation by
municipal authorities with respect to street openings and the use of streets for
erecting poles in incorporated cities and towns. Concerning gas distribution,
PSE&G has the right to use the roads, streets, highways and public grounds in
New Jersey for pipes and conduits.

Industry Issues

Enterprise and PSE&G are affected by many issues that are common to the
electric and gas industries such as: an increasingly competitive energy
marketplace, sales retention and growth potential in a mature service territory;
the need to reduce costs and deregulation and the unbundling of energy supplies
and services (see Competitive Environment); the ability to obtain adequate and
timely rate relief, cost recovery and other necessary regulatory approvals (see
Note 3--Rate Matters of Notes); the ability to economically operate nuclear
facilities in accordance with regulatory requirements (see Nuclear Operations);
increased capital investments attributable to environmental regulations (see
Construction and Capital Requirements and Environmental Controls); nuclear
decommissioning and the availability of reprocessing and storage facilities for
spent nuclear fuel (see Electric Fuel Supply and Disposal); and credit market
concerns associated with these issues.

Segment Information

Financial information with respect to business segments of PSE&G and
Enterprise is set forth in Note 16--Financial Information by Business Segments
of Notes.

Competitive Environment

Overview

The regulatory structure which has historically governed the electric and
gas industry is in transition. Legislative and regulatory initiatives, at both
the federal and state levels, are designed to promote competition and will
continue to impose additional pressures on PSE&G's ability to retain customers.
In addition, new technology and interest in self generation and cogeneration
have provided customers with alternative sources and supplies of energy.
Retention of existing customers and potential sales growth will depend upon the
ability of PSE&G to reduce costs, meet customer expectations and respond to
changing economic conditions and energy regulation.

Federal Regulatory Bodies

PSE&G is subject to regulation by the Federal Energy Regulatory Commission
(FERC) with respect to certain matters, including interstate sales and exchanges
of electric transmission, capacity and energy. Enterprise is not subject to
regulation by the FERC. Enterprise has claimed an exemption from regulation by
the Securities and Exchange Commission (SEC) as a registered holding company
under the Public Utility Holding Company Act of 1935 (PUHCA), except for Section
9(a)(2) thereof, which relates to the acquisition of 5% or more of the voting
securities of an electric or gas utility company. Construction and operation of
nuclear generating facilities are regulated by the Nuclear Regulatory Commission
(NRC). For additional information relating to regulation by the NRC, see Nuclear
Operations. In addition, the Federal Emergency Management Agency is responsible
for the review, in conjunction with the NRC, of certain aspects of emergency
planning relating to the operation of nuclear plants.

Federal Regulation (Electric)

The electric industry is currently undergoing restructuring as a result of
federal legislation and regulatory initiatives. The National Energy Policy Act
of 1992 (EPAct) eased restrictions on independent power producers (IPP) in an
effort to increase competition in the wholesale electric generation market. As
the barriers to entry in the power production business have been lowered, the
construction of cogeneration facilities and independent power production
facilities has been growing, resulting in lower cost alternatives for large
commercial and industrial customers.

FERC Order No. 888, requiring all public utilities owning, controlling or
operating transmission lines to file nondiscriminatory open access tariffs that
offer others the same wholesale transmission service utilities provide to
themselves, became effective on July 9, 1996. By March 1, 1997, intra-pool
transactions for power pools must also be under a nondiscriminatory, pool-wide
open access tariff. Transmission services covered by Order No. 888 include
network and point-to-point services, as well as ancillary services and a pro
forma tariff setting minimum terms and conditions of service for
nondiscriminatory open access transmission service. Public utilities are
required both to offer service to others under the pro forma tariff and to use
the pro forma tariff for their own wholesale energy sales and purchases. This
Order also provides public utilities with the opportunity to seek full recovery
of prudently incurred, legitimate and verifiable stranded costs resulting from
the transfer of open access wholesale transmission service customers to another
supplier. To be eligible for recovery, stranded costs must be associated with
wholesale requirement contracts signed before July 11, 1994. After that date,
recovery must be specifically provided for in the contract. FERC has ruled that
stranded costs should be recovered from a utility's departing wholesale
customers. FERC has also stated that if costs are stranded by retail wheeling,
utilities should first look to the states to recover those costs. FERC will
become involved only if state regulators lack authority under state law to
provide for stranded cost recovery.

As a result of open access mandated by Order No. 888, there is likely to be
increased competition from lower-cost, coal-fired plants in the Midwest that are
subject to less restrictive pollution control requirements than utilities in
Northeastern states. These facilities, by increasing their power production in
order to sell into higher priced markets including the Northeast, will, in turn,
increase the release of pollutants that eventually make their way to New Jersey
and other northeastern states due to the prevailing westerly winds.

Numerous parties, including PSE&G, have filed requests seeking rehearing
and clarification of various aspects of Order No. 888. These filings are
currently pending before FERC. After exhausting administrative remedies,
judicial appeals of this Order may also occur. It is possible, therefore, that
this Order will be substantially modified.

For discussion of the Pennsylvania, New Jersey, Maryland Interconnection
(PJM) proposal in response to Order No. 888, see Pennsylvania--New
Jersey--Maryland Interconnection. For a discussion of PSE&G's actions related to
the potential environmental impact of Order No. 888, see Environmental
Controls--Air Pollution Control.

Federal Regulation (Gas)

Over the last decade the natural gas industry has experienced a dramatic
transformation as several FERC initiatives have subjected the industry to
competitive market forces. On the interstate level, the pipeline suppliers that
serve PSE&G have unbundled gas supply and transportation service and now offer
transportation services that move gas purchased from numerous natural gas
producers and marketers to PSE&G's service territory.

State Regulatory Bodies

As a New Jersey public utility, PSE&G is subject to comprehensive
regulation by the New Jersey Board of Public Utilities (BPU) including, among
other matters, regulation of intrastate rates and service and of the issuance
and sale of securities. As a participant in the ownership of certain generation
and transmission facilities in Pennsylvania, PSE&G is subject to regulation by
the Pennsylvania Public Utility Commission (PPUC) in limited respects in regard
to such facilities. Enterprise is not subject to direct regulation by the BPU,
except potentially with respect to certain transfers of control and reporting
requirements. The BPU may also impose certain requirements with respect to
affiliate transactions between and among PSE&G, Enterprise and Enterprise's
non-utility subsidiaries. (See EDHI.)

State Regulation (Electric)

EPAct prevents FERC from ordering retail wheeling and preserves any
existing state authority to mandate retail wheeling. New Jersey regulators have
been reviewing existing regulations in an effort to develop a revised regulatory
structure that would afford public utilities, such as PSE&G, increased
flexibility to meet the competitive challenges of the future.

On January 16, 1997, the BPU issued its draft report regarding Phase II of
the New Jersey Energy Master Plan (draft Phase II report) addressing wholesale
and retail electric competition in New Jersey. The draft Phase II report
proposes the restructuring of the electric power industry in New Jersey.
Beginning in October 1998, 5% of retail electric customer load of all classes
(industrial, commercial and residential) would be allowed to directly choose
their electric power supplier. All customers would be phased-in, with the
percentage increasing to 20% in April 1999, 35% in October 1999, 50% in April
2000, 75% in October 2000 and 100% in April 2001. For a discussion of the draft
Phase II report, see Competitive Environment of Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A).

Phase I of the New Jersey Energy Master Plan, issued in 1995, called for
legislation that would allow New Jersey utilities to propose, subject to BPU
approval, alternatives to rate base/rate of return pricing, allow for pricing
flexibility under certain standards for customers with competitive options and
equalize the impact of tax policies (such as the New Jersey Gross Receipts and
Franchise Tax (NJGRT) currently assessed on retail energy utility sales) upon
all energy producers. Customers of PSE&G, as well as those of other New Jersey
electric and gas utilities, pay the NJGRT which, in effect, adds approximately
13% to their bills. The NJGRT is a unit tax based on electric kilowatt-hour and
gas therm sales. This tax provides an incentive to large-volume electric and gas
customers to obtain their energy supplies from non-utility sources not subject
to NJGRT. A joint task force of the BPU and the New Jersey Treasury Department
has proposed replacing the current NJGRT with a combination of the existing
corporate business tax, existing state sales and use tax and a transitional
assessment which would be phased out over an expected seven year time frame.
After the phase-out is completed, the proposal is expected to improve the
competitive position of electric and gas utilities vis-a-vis non-utility
energy providers in the New Jersey markets. Although proposed legislation to
implement this tax change has been introduced in the state legislature, PSE&G
cannot predict when or if this proposal will be adopted.

Following adoption of the legislation recommended by the Phase I report,
PSE&G filed a petition with the BPU for its New Jersey Partners in Power Plan in
January 1996 to provide PSE&G with the mechanisms and incentives to compete more
effectively on several fronts, including the ability to develop revenue from
non-regulated products and services, accelerate or modify depreciation schedules
to help mitigate potential stranded costs and more aggressively manage costs. On
January 31, 1997, in recognition of the fact that the mandatory rate proceedings
required by the draft Phase II report rendered its filing moot, PSE&G withdrew
its 1996 rate filing, the New Jersey Partners in Power Plan, from further BPU
consideration. For information on rate matters, including the recently approved
settlement agreement that resolved three regulatory issues before the BPU, see
Note 3--Rate Matters of Notes.

State Regulation (Gas)

PSE&G's unbundled gas transportation tariffs, which have been in place
since 1994, allow any nonresidential customer, regardless of size, to purchase
its own gas, transport it to PSE&G and require PSE&G to deliver such gas to the
customer's facility. To date, over 10,000 commercial and industrial customers,
out of a total of approximately 180,000 such customers, have elected to utilize
this service. It is expected that this number will continue to grow as marketers
become more active in New Jersey and encourage customers to convert from PSE&G's
sales tariff. PSE&G has a proposal pending before the BPU that would offer
unbundled gas services to residential customers of four towns on a pilot basis
(see Competitive Environment of MD&A). Current transportation rate schedules
produce the same non-fuel revenue per therm as existing sales tariff rate
schedules (see State Regulation (Electric) for a discussion of the NJGRT). Thus,
to date, PSE&G's earnings have been unaffected by whether the customers remain
on sales tariffs or convert to transportation service. Enterprise's indirect
subsidiary, ERI, is a non-utility gas marketing company which operates in New
Jersey and several other states (see EDHI--ERI).

Other State Regulatory Matters

The New Jersey Public Utility Accident Fault Determination Act (Fault Act)
requires the BPU to make a determination of fault with regard to any accident at
any electric generating or transmission facility prior to granting a request by
any utility for a rate increase to cover accident-related costs in excess of $10
million. Fault, as defined in the Fault Act, means any negligent action or
omission of any party which either contributed substantially to causing the
accident or failed to mitigate its severity. The Fault Act could have a material
adverse effect on PSE&G's financial position if such an accident were to occur
at a PSE&G facility, it was ultimately determined that the accident was due to
the fault of PSE&G and the BPU were to deny recovery of all or a portion of the
costs related thereto.

The Fault Act allows the affected utility to file for non-accident related
rate increases during such fault determination hearings and to recover
contributions to federally mandated or voluntary cost-sharing plans and allows
the BPU to authorize the recovery of certain fault-related repair, clean-up,
power replacement and damage costs if substantiated by the evidence presented
and if authorized in writing by the BPU.

Under New Jersey law, the BPU is required to audit all or a portion of the
operating procedures and other internal workings of every gas or electric
utility subject to its jurisdiction, including PSE&G, at least once every six
years. The BPU may, upon completion of the audit and after notice and hearing,
order the utility to adopt such new practices and procedures that it shall find
reasonable and necessary to promote efficient and adequate service to meet
public convenience and necessity. PSE&G cannot predict when the next BPU audit
of its operations will commence.

As a result of a follow-up to PSE&G's last management audit, the BPU
approved a plan which, among other things provides: (1) that Enterprise will not
permit EDHI's non-utility investments to exceed 20% of Enterprise's consolidated
assets without prior notice to the BPU (such investments at December 31, 1996
were approximately 12% of assets); (2) that the PSE&G Board of Directors include
non-employee Enterprise directors, with an annual certification by such Board
that the business and financing plans of EDHI will not adversely affect PSE&G;
(3) that Enterprise agree to (a) limit debt supported by the minimum net worth
maintenance agreement between Enterprise and Capital to $750 million, and (b)
make a good-faith effort to eliminate such support over a six to ten year period
from April 1993; and (4) that EDHI pay PSE&G an affiliation fee of up to $2
million a year to be applied by PSE&G through its Levelized Gas Adjustment
Charge (LGAC) and Electric Levelized Energy Adjustment Clause (LEAC) to reduce
utility rates. Effective January 31, 1995, the debt supported by the minimum net
worth maintenance agreement was limited to $650 million and the affiliation fee
was and will be proportionately reduced as such supported debt is reduced.
Enterprise and EDHI and its subsidiaries continue to reimburse PSE&G for the
costs of all services provided to them by employees of PSE&G.

The issue of Enterprise sharing the benefits of consolidated tax savings
with PSE&G or its ratepayers was addressed by the BPU in a July 28, 1995 letter
which informed PSE&G that the issue of consolidated tax savings can be discussed
in the context of its next base rate case or plan for an alternative form of
regulation. The BPU's letter in this action served as closure of the most recent
management audit. Enterprise believes that PSE&G's taxes should be treated on a
stand-alone basis for rate-making purposes, based on the separate nature of the
utility and non-utility businesses. However, neither Enterprise nor PSE&G is
able to predict what action, if any, the BPU may take concerning consolidation
of tax benefits in future proceedings.

Construction and Capital Requirements

For information concerning investments, construction and capital
requirements see Construction and Capital Requirements of MD&A, Note 7--Schedule
of Consolidated Debt, Note 8--Long-Term Investments and Note 13--Commitments and
Contingent Liabilities of Notes.

Financing Activities

For a discussion of issuance, repurchase, book value and market value of
Enterprise's Common Stock and external financing activities of Enterprise, PSE&G
and EDHI for the year 1996, see Liquidity and Capital Resources of MD&A and Item
5. Market for Registrant's Common Equity and Related Stockholder Matters.

For a discussion of Capital and Funding, see EDHI--Capital and
EDHI--Funding. For further discussion of long-term debt and short-term debt, see
Note 7--Schedule of Consolidated Debt of Notes.

Federal Income Taxes

For information regarding Federal income taxes, see Note 1--Organization
and Summary of Significant Accounting Policies, Note 3--Rate Matters and Note
11--Federal Income Taxes of Notes.

Credit Ratings

The current ratings of securities of Enterprise's subsidiaries are shown
below and reflect the respective views of the rating agencies, from whom an
explanation of the significance of their ratings may be obtained. There is no
assurance that these ratings will continue for any given period of time or that
they will not be revised downward or withdrawn entirely by the rating agencies,
if, in their respective judgments, circumstances so warrant. Any downward
revision or withdrawal may adversely effect the market price of Enterprise's
Common Stock and PSE&G's securities and serve to increase the cost of capital of
PSE&G and EDHI.

Standard & Duff &
Moody's Poor's Phelps
------- ----------- -------
PSE&G
-----
Mortgage Bond................................... A3 A- A
Debenture Bond.................................. Baa1 BBB+ A-
Preferred Stock................................. Baa1 BBB+ A-
Commercial Paper................................ P2 A2 Duff 1
Commercial Paper (PSE&G Fuel Corp).............. P2 A2 Duff 1

As a component of the ratings noted above, each rating agency issues its
opinion of the credit trend or outlook for PSE&G. Each of the three rating
agencies currently evaluate that outlook as negative. Since the end of 1996,
Moody's, Standard & Poor's and Duff & Phelps have reviewed and affirmed the
ratings noted above.

Standard & Duff &
Moody's Poor's Phelps
------- ----------- -------
EDHI
----

Senior Debt (Capital).......................... Baa2 BBB BBB+

PSE&G

Rate Matters

For information concerning the New Jersey Energy Master Plan, PSE&G's rate
matters, and environmental remediation and fuel adjustment clauses see
Competitive Environment-State Regulation (Electric), Note 1--Organization and
Summary of Significant Accounting Policies and Note 3--Rate Matters of Notes.
For information concerning PSE&G's Under (Over) recovered Electric Energy and
Gas Fuel Costs, see Note 6--Deferred Items of Notes.

Customers

As of December 31, 1996, PSE&G provided service to approximately 1.9
million electric customers and 1.5 million gas customers. PSE&G is not dependent
on a single customer or a few customers for its electric or gas sales. For the
year ended December 31, 1996, PSE&G's operating revenues aggregated $5.8
billion, of which 68% was from its electric operations and 32% from its gas
operations. PSE&G's business is seasonal in that sales of electricity are higher
during the summer months because of air conditioning requirements and sales of
gas are greater in the winter months due to the use of gas for space-heating
purposes.

1996 Revenues were derived as follows:

Revenues
--------
Electric Gas
-------- ---
(Millions of Dollars)
---------------------

Residential.............................. $1,242 $ 932
Commercial............................... 1,824 475
Industrial............................... 652 318
Transportation Service--Gas.............. -- 88
Other.................................... 226 68
------ ------
Total............................... $3,944 $1,881
====== ======

For information on the impact of competition on PSE&G's customer and
revenue base, see Competitive Environment--State Regulation and Competitive
Environment of MD&A.

Integrated Resource Plan (IRP)

Pursuant to its IRP, PSE&G periodically reevaluates its forecasted customer
load and peak growth and the sources of electric generating capacity and Demand
Side Management (DSM) to meet such projected growth (see Demand Side Management
below). The IRP takes into account assumptions concerning future customer
demand, future cost trends, especially fuel and purchased power expenses, the
effectiveness of conservation and load management activities, the long-term
condition of and projected additions to PSE&G's plants and capacity available
from other electric utilities and non-utility suppliers. The IRP forecasts a
compound annual rate of growth of 1.3% for electric system peak demand over the
period 1997-2001.

Pennsylvania--New Jersey--Maryland Interconnection (PJM)

PSE&G is a member of the PJM which integrates the bulk power generation and
transmission supply operations of 11 utilities in Pennsylvania, New Jersey,
Delaware, Maryland, Virginia and the District of Columbia, and, in turn, is
interconnected with other major electric utility companies in the northeastern
part of the United States. The PJM is operated as one system and provides for
the purchase and sale of power among members on the basis of reliability of
service and operating economy. As a result, the most economical mix of
generating capability available is used to meet PJM daily load requirements.
PSE&G's output, as shown under Electric Fuel Supply and Disposal, reflects
significant amounts of purchased power because at times it is more economical
for PSE&G to purchase power from PJM and others than to produce it. As of
December 31, 1996, the aggregate installed generating capacity of the PJM
companies was 57,308 megawatts (MW). The all time record peak one-hour demand
experienced by PJM was 48,524 MW which occurred on August 2, 1995. PSE&G's
capacity obligations to the PJM system vary from year to year due to changes in
system characteristics. PSE&G expects to have sufficient installed capacity to
meet its obligations during the 1997-2001 period.

PSE&G is also a party to the Mid-Atlantic Area Reliability Council (MAAC)
which provides for review and evaluation of plans for generation and
transmission facilities and other matters relevant to reliability of the bulk
electric supply systems in the Mid-Atlantic area.

In July 1996, the member companies of PJM, except for PECO Energy Company
(PECO), filed a proposal in response to Order No. 888 to reorganize PJM into an
Independent System Operator (ISO) to administer a pool-wide open-access
transmission tariff and to operate a centrally dispatched bid-based energy
market. PECO filed a separate proposal with FERC. On November 13, 1996, FERC
announced that it was rejecting the restructuring proposals of both PECO and the
other PJM companies due to concerns regarding the independence of the proposed
ISO, among other things.

FERC's November 13, 1996 Order directed PJM to submit a single consensus
pool restructuring proposal after gathering public input. Recognizing the
difficulty of achieving a consensus on a comprehensive restructuring proposal by
the December 31, 1996 deadline for compliance with Order No. 888, FERC urged the
PJM companies to minimally comply by filing a pool-wide open access transmission
tariff and a reformed pooling agreement by year end. During December 1996, PJM
conducted five public meetings which resulted in a single "interim" compliance
filing at FERC on December 31, 1996.

There are significant differences between the PECO and the other PJM
companies' approaches to the energy market and design of transmission tariffs.
If the PECO rate design position prevails, the result could be an adverse
revenue impact of up to $40 million annually to PSE&G due to transmission tariff
sensitivity. Transmission tariff sensitivity is driven principally by
uncertainty with respect to the ultimate rate design methodology FERC approves,
and the allocation of transmission costs of service of the various PJM companies
in the final FERC tariff.

The PJM Companies are currently meeting among themselves and with other
interested stakeholders in an attempt to reach consensus on a more comprehensive
restructuring of PJM, including the establishment of an ISO, with the goal of
making a consensus restructuring filing with FERC by May 31, 1997.

Power Purchases

A component of PSE&G's IRP consists of expected capacity additions from
Non-utility Generators (NUGs). NUG projects are expected to comprise
approximately 6.5% of capacity resources by 2005. This availability of NUG
generation reduces the need for PSE&G to build or acquire additional generation.

Demand Side Management (DSM)

In order to encourage DSM, the BPU adopted rules in 1991 to encourage
utilities to offer DSM related load management and conservation services. These
rules were re-adopted in October 1996 with minimal changes. The rules are
designed to place DSM on equal regulatory footing with supply side or energy
production investments. In its January 16, 1997 Draft Phase II report, the BPU
proposes that during the transition to a restructured industry, DSM programs
continue to be implemented by utilities and funded through rates. Initially, the
existing DSM rules would apply. For the longer term, the rules would be modified
to reflect increasing reliance on market forces to drive DSM (see Competitive
Environment--State Regulation).

PSE&G's current DSM Resource Plan was approved by the BPU in 1995 and is
designed to encourage investment in energy-saving DSM activities. These
activities involve energy saving techniques and technologies, such as
high-efficiency lighting and motors, which help reduce customer demand for
energy. The DSM Resource Plan consists of two major program areas for both
electric and gas: (1) a core program which includes many specialized programs
such as energy audits, seal-ups and rebates for high efficiency heating and
cooling equipment; and (2) a standard offer program which is performance based
and provides payment for measurable energy savings resulting from the
installation of qualified measures that improve the energy efficiency of
end-uses.

PSE&G's IRP calls for PSE&G to utilize DSM to meet most of its incremental
resource needs for the next decade. PSE&G projects 417 MW of passive DSM and
397 MW of active DSM by the year 2001.

Electric Generating Capacity

The following table sets forth certain information as to PSE&G's installed
generating capacity as of December 31, 1996:

Installed
Capacity (a)
Source (MW) Percentage
- ---------------------------------------------- --------------- --------------
Conventional Steam Electric
Oil-fired (b)............................. 1,723 17
Coal-fired New Jersey (c)................. 1,242 12
Coal-fired Pennsylvania (mine mouth) (d).. 770 7
Combustion Turbine (e)......................... 2,724 26
Combined Cycle............................ 890 9
Diesel (d)................................ 5 --
Nuclear (d)
New Jersey........................... 1,921 18
Pennsylvania......................... 930 9
Pumped Storage (d) (e).................... 200 2
--------------- --------------
Total........................... 10,405 100
--------------- --------------

(a) Excludes 664 MW of non-utility generation and 115 MW of capacity sales to
Atlantic City Electric Company (ACE), Delmarva Power & Light Company
(DP&L) and GPU, Inc.
(b) Units with aggregate capacity of 836 MW can also burn gas.
(c) Can also burn gas.
(d) PSE&G share of jointly owned facilities.
(e) Primarily used for peaking purposes.

For additional information, see Item 2. Properties--PSE&G--Electric
Properties.

The capacity available at any time may be less than the installed capacity
because of temporary outages for inspection, maintenance, repairs, legal and
regulatory requirements or unforeseen circumstances. The maximum one-hour demand
(peak load) which PSE&G experienced in 1996 was 8,439 MW, which occurred on
August 23, 1996, when the day's output was 159,184 megawatt-hours (MWH) of
electricity. The all time peak load record is 9,467 MW, which occurred on August
2, 1995, when the day's output was 182,404 MWH of electricity.

PSE&G expects to be able to continue to meet the demand for electricity on
its system through operation of available equipment and by power purchases.
However, if periods of unusual demand should coincide with outages of equipment,
PSE&G could find it necessary at times to reduce voltage or curtail load in
order to safeguard the continued operation of its system.

Nuclear Operations

PSE&G has an ownership interest in five nuclear generating units and
operates three of these, Salem Units 1 and 2 and Hope Creek. PECO operates Peach
Bottom Units 2 and 3. Operation of nuclear generating units involves continuous
close regulation by the NRC. Such regulation involves testing, evaluation and
modification of all aspects of plant operation in light of NRC safety and
environmental requirements and continuous demonstrations to the NRC that plant
operations meet applicable requirements. The NRC has the ultimate authority to
determine whether any nuclear generating unit may operate. For information
concerning the performance of the nuclear units, see Note 13--Commitments and
Contingent Liabilities of Notes.

The scheduled 1997, 1998, and 1999 refueling outages, ranging from five to
ten weeks in duration, for PSE&G's five licensed nuclear units are expected to
commence in the following months:

Refueling Outages
1997 1998 1999
- ------------------------ ------------- -------------- -------------
Salem 1............ -- (a) --
Salem 2............ -- (a) (a)
Hope Creek......... September -- January
Peach Bottom 2..... -- September --
Peach Bottom 3..... September -- September

(a) Refueling outage will be scheduled to commence approximately 18 months
subsequent to Unit's return to service and 18 months thereafter.

Salem

Salem Generating Station consists of two 1106 MW pressurized water nuclear
reactors (PWR) located in southern New Jersey on the Delaware River. PSE&G owns
42.59% of the Salem units and operates them on behalf of itself and three other
owners: PECO--42.59%; ACE--7.41%; and DP&L--7.41%. As of December 31, 1996,
PSE&G's net book value was approximately $214 million for Salem 1, $257 million
for Salem 2 and $155 million in common plant between the two units. Each Salem
unit represents approximately 4% of PSE&G's installed electric generating
capacity, approximately 2% of its total assets and approximately 3% to 4% of its
net utility plant in service.

As previously reported, Salem Units 1 and 2 were taken out of service by
PSE&G in the second quarter of 1995 and remain out of service. During these
outages, PSE&G has made significant changes and improvements related to the
people, processes and equipment at Salem to improve the long-term reliability of
the units. During the course of these outages, PSE&G has also been required to
address certain generic issues applicable to nuclear power plants, which have
contributed to the length of the outages.

Salem Unit 2 is in the final stage of preparation for restart. The reactor
has been refueled and reassembled and the reactor coolant pumps have been tested
and placed in service. Over 90% of the total work activities have been completed
and approximately 80% of the plant systems have been restored. The unit is
scheduled to enter Mode 4 in late February/early March 1997 which will allow
additional testing to be performed in preparation for start-up.

A generic letter from the NRC (used to notify the nuclear industry of
issues affecting nuclear plants generally) identified an issue that has impacted
the Salem Unit 2 start-up schedule. This Generic Letter (96-06) requested all
nuclear utilities, including PSE&G, to review systems for potential waterhammer
events (hydrodynamic stress caused by steam formation in a piping system) and
the impact that these events could have on the system's safety function. PSE&G
determined that in order to address the concerns of Generic Letter 96-06,
modifications were necessary to the containment fan coil units of Salem Units 1
and 2, which provide containment air cooling. As a result of installation of
these modifications and the time required for NRC acceptance of PSE&G's proposed
resolution of these issues, the start-up of Salem Unit 2 has been delayed,
resulting in an expected return to service in the second quarter of 1997.

Salem Unit 1 is expected to return to service in the Fall of 1997, after
replacement of the unit's four steam generators, which was required in order to
correct a generic problem with certain PWRs. Removal of the old steam generators
has been completed and installation of the new steam generators is underway.
Salem Unit 1 will also require modifications similar to Salem Unit 2 to respond
to Generic Letter 96-06, but such modifications are not expected to further
delay that unit's return to service.

At the January 1997 semi-annual NRC Senior Management Meeting, the Salem
Units were placed on the NRC's Watch List and designated as a Category 2
facility (i.e., a plant that is authorized to operate, but one that the NRC will
monitor closely). In a letter to PSE&G advising of the action, the NRC noted
that this action was not due to any performance problems or decline during its
current evaluation period. The letter stated that the NRC staff was satisfied
with the overall approach being taken by PSE&G to return the Salem Units to
service. The letter acknowledged many positive steps that have been taken at
Salem including the strong management team that has been assembled, numerous
plant components that have been refurbished or replaced, extensive training and
requalification programs for the operations and maintenance staffs and
strengthened engineering support. However, the letter indicated that Salem
should have been previously designated as a Category 2 plant and that it would
not be ready to leave that status until satisfactory integrated station
performance at power could be observed.

Restart of the units is subject to completion of the requirements of the
restart plan to the satisfaction of PSE&G and the NRC, which encompasses a
review and improvement of personnel, process and equipment issues. On January
14, 1997, Senator Joseph Biden of Delaware wrote to the NRC to request that the
full Commission vote on the decision to restart Salem, rather than permit the
NRC staff to authorize the restart under applicable NRC rules. By letter to
Senator Biden dated February 20, 1997, the NRC advised that it would not require
a full commission vote on Salem restart. The inability to successfully return
these units to continuous, safe operation could have a material adverse effect
on the financial position, results of operations or net cash flows of Enterprise
and PSE&G.

The outage of a Salem unit causes PSE&G to incur replacement power costs of
approximately $4 to $6 million per month. Such amounts vary, however, depending
on the availability of other generation, the cost of purchased energy and other
factors, including modifications to maintenance schedules of other units. For
certain litigation relating to Salem, see Item 3--Legal Proceedings and Note
13--Commitments and Contingent Liabilities of Notes. For discussion of the costs
related to the Salem shutdown, see Nuclear Operations of MD&A.

Hope Creek

Hope Creek Generating Station consists of one 1031 MW boiling water nuclear
reactor (BWR) located in southern New Jersey on the Delaware River adjacent to
Salem. PSE&G owns 95% of Hope Creek and operates the unit on behalf of itself
and ACE, which owns the remaining 5%. As of December 31, 1996, PSE&G's net book
value for Hope Creek was approximately $2.9 billion. Hope Creek represents
approximately 9% of PSE&G's installed electric generating capacity,
approximately 20% of its total assets and approximately 28% of its net utility
plant in service.

Hope Creek successfully completed its sixth refueling and maintenance
outage in March 1996. An outage at Hope Creek causes PSE&G to incur replacement
energy costs of approximately $10 to $16 million per month. Such amounts vary,
however, depending upon the availability of other generation, the cost of
purchased energy and other factors including modifications to maintenance
schedules of other units.

On December 24, 1996, the NRC issued its latest periodic Systematic
Assessment of Licensee Performance (SALP) report for Hope Creek for the period
between April 23, 1995 and November 9, 1996. The NRC noted that overall
performance improved during the SALP period, after a significant decline in
performance that occurred early in the period. Further, the NRC noted that
PSE&G's actions to address the areas of concern, once identified, were
comprehensive and generally effective. Three areas, Operations, Maintenance and
Engineering, were each rated Category 2, as they had been in the previous SALP
rating. Improvements were noted in these areas with most of the improvement in
Operations and Maintenance occurring later in the period. The fourth area, Plant
Support, was also rated Category 2, a decline from the previous SALP rating due
to problems principally with security, radiation protection and emergency
preparedness implementation. Weaknesses in communication contributed to
performance issues across the organization.

Peach Bottom

Peach Bottom Atomic Power Station consists of two 1093 MW BWRs located in
Southeastern Pennsylvania on the Susquehanna River. PECO owns 42.49% of the
Peach Bottom units and operates them on behalf of itself and three other owners:
PSE&G 42.49%; ACE 7.51%; and DP&L 7.51%. As of December 31, 1996, PSE&G's net
book value was approximately $203 million for Peach Bottom 2 and $209 million
for Peach Bottom 3. Each Peach Bottom unit represents approximately 4% of
PSE&G's installed electric generating capacity, approximately 1.5% of its total
assets and approximately 2% of its net utility plant in service.

Peach Bottom 2 successfully completed a scheduled refueling and maintenance
outage in November 1996. The outage of a Peach Bottom unit causes PSE&G to incur
additional replacement energy costs of approximately $4 to $6 million per month
per unit. Such amounts vary, however, depending upon the availability of other
generation, the cost of purchased energy and other factors including
modifications to maintenance schedules of other units.

Other Nuclear Matters

In 1990, General Electric (GE) reported that crack indications were
discovered near the seam welds of the core shroud assembly in a GE BWR located
outside the United States. As a result, GE issued a letter requesting that the
owners of GE BWR plants take interim corrective actions. PSE&G (Hope Creek) and
PECO (Peach Bottom) participated in a GE BWR Owners' Group to evaluate this
issue and develop long-term corrective actions. During its 1994 refueling
outage, PSE&G inspected the shroud of Hope Creek in accordance with GE's
recommendations and found no cracks. In June 1994, an industry group was formed
and subsequently established generic inspection guidelines which were approved
by the NRC. Hope Creek has been placed in the lowest susceptibility category
under these guidelines. Hope Creek must do another shroud inspection during its
next refueling outage in 1997, or perform a preemptive repair that would
maintain the structural integrity of the shroud under all normal and design
basis accident conditions for the remaining life of the plant.

PECO has advised PSE&G that Peach Bottom 3 was examined during its 1995
refueling outage and that its examinations disclosed that the extent of cracking
identified was to be within industry-established guidelines and that there is a
substantial margin for each core shroud weld to allow for continued operations
of Unit 3. PECO has also advised that Peach Bottom 2 was reinspected during its
1996 refueling outage. The examinations disclosed that while additional minor
flaw indications were discovered, PECO concluded, and the NRC concurred, that
neither repair nor modification to the core shroud was necessary prior to
restarting the reactor.

In a separate matter, as a result of several BWRs experiencing clogging of
some emergency core cooling system suction strainers, which supply water from
the suppression pool for emergency cooling of the core and related structures,
the NRC issued a Bulletin in May 1996 to operators of BWRs requesting that
measures be taken to minimize the potential for clogging. The NRC has proposed
three resolution options, with a request that actions be completed by the end of
the unit's first refueling outage after January 1997. Alternative resolution
options will be subject to NRC approval. PSE&G has responded to the NRC,
indicating its intention to comply with the Bulletin, and expects to submit its
planned actions and schedules for Hope Creek after the NRC approves a utility
resolution guidance document. PECO has advised PSE&G that large capacity passive
strainers will be installed at Peach Bottom Units 3 and 2 during their next
refueling outages in September 1997 and September 1998, respectively. PSE&G
cannot predict what other actions, if any, the NRC may take in this matter.

In August 1996, the NRC conducted an inspection of the Physical Security
Program for Salem and Hope Creek. Based on the results of that inspection,
apparent violations were identified. On December 11, 1996, PSE&G received a
$100,000 civil penalty for two severity level III violations and three severity
level IV violations were received with no civil penalty. PSE&G will not dispute
these violations.

In October 1996, PSE&G and PECO, along with other nuclear plant operators,
received a request for information from the NRC regarding the adequacy and
availability of each plant's design bases data. The NRC is requiring that
information be submitted under oath and affirmation to provide it added
confidence and assurance that all nuclear units are operated and maintained
within the design bases of the facilities and that any deviations have been or
will be reconciled in a timely manner. PSE&G responded to the NRC's request on
February 11, 1997 with a detailed description of ongoing activities and new
initiatives to ensure that Salem and Hope Creek are operated and maintained
within their design bases. Since the information which was submitted will be
used by the NRC to determine follow-up inspection activity or potential
enforcement actions, PSE&G cannot at this time predict what impact the NRC's
request will have.

On December 11, 1996, PSE&G received a severity level II violation and an
$80,000 civil penalty from the NRC for apparent violations which occurred in
1993 and early 1994, involving alleged discrimination against two employees for
their engagement in protected activities in accordance with federal regulations.
PSE&G will not dispute this violation.

Nuclear Decommissioning

In accordance with the Nuclear Waste Policy Act of 1982, as amended (NWPA),
utilities owning an interest in nuclear generating facilities are required to
determine the costs and funding methods necessary to decommission such
facilities upon termination of operation. As a general practice, each nuclear
utility places funds in independent external trust accounts it maintains to
provide for decommissioning. PSE&G currently recovers from its customers the
amounts paid into the trust fund over a period of years. For information
concerning nuclear decommissioning costs, see Note 4--PSE&G Nuclear
Decommissioning of Notes.

Electric Fuel Supply and Disposal

The following table indicates PSE&G's MWH output by source of energy:

Actual Estimated
Source 1996 1997
- --------------------------------------------------------- -------- ---------
Nuclear
New Jersey facilities............................ 15% 27%
Pennsylvania facilities.......................... 17 15
Fossil
Coal
New Jersey facilities.......................... 9 12
Pennsylvania facilities........................ 13 12
Natural Gas...................................... 5 5
Residual Oil..................................... 0 0
Net PJM Interchange and Purchases From Utilitiesd
and NUGs............................................ 41 29
-------- ---------
Total..................................... 100% 100%

PSE&G's cost of fuel used to generate electricity in the periods shown
below was as follows:

NATURAL
NUCLEAR COAL GAS OIL
------- ---- ---------- ------------------------

NEW JERSEY PENNSYLVANIA
FACILITIES FACILITIES
---------------------- ----------------------
Cents/ Cents/ Cents/ Cents/ Cents/
Million Million Million Million Million
Year BTU $/Ton BTU $/Ton BTU BTU $/Barrel BTU
- --------- --------- --------- --------- -------- ---------- ---------- ---------- --------

1994 62.3 56.31 213.8 34.78 140.7 197.8 22.19 361.02
1995 60.8 58.29 214.0 33.30 134.4 176.6 20.17 324.50
1996 55.7 53.85 205.32 34.67 140.35 325.92 29.02 476.84

PSE&G's current electric rate structure is designed to permit the recovery of
fuel costs on a current annual basis (see Note 3--Rate Matters of Notes).

Nuclear Fuel

The supply of fuel for nuclear generating units involves the mining and
milling of uranium ore to uranium concentrate, conversion of the uranium
concentrate to uranium hexafluoride, enrichment of the uranium hexafluoride gas,
conversion of the enriched gas to fuel pellets and fabrication of fuel
assemblies.

PSE&G has several long-term contracts with ore operators to process uranium
ore to uranium concentrate to meet the currently projected requirements for the
Salem and Hope Creek units fully through the year 2001 and, thereafter, 50% of
their requirements through the year 2003.

The length of contracts for conversion, enrichment and fabrication services
to meet the fuel cycle requirements for Salem and Hope Creek units are shown in
the following table:

Nuclear Unit Conversion Enrichment Fabrication
------------ ---------- ---------- -----------
Salem 1...................... 2001 (1) 2004
Salem 2...................... 2001 (1) 2005
Hope Creek................... 2001 (1) 2000

(1) 100% coverage through 1998; approximately 50% through 2002; and
approximately 30% through 2004. PSE&G does not anticipate any
difficulties in obtaining necessary enrichment service for its Salem and
Hope Creek units.

PSE&G has been advised by PECO that it has contracts for the purchase of
uranium which will satisfy the fuel requirements of Peach Bottom 2 and 3 through
2002. PECO has also advised PSE&G that it has contracted for the following
segments of the nuclear fuel supply cycle for Peach Bottom 2 and 3 through the
following years:

Nuclear Unit Conversion Enrichment Fabrication
------------ ---------- ---------- -----------
Peach Bottom 2............... 2001 2004 1999
Peach Bottom 3............... 2001 2004 2000

Coal

Approximately 40% of PSE&G's coal supply for its New Jersey facilities is
obtained under a contract which expires in 1999. The balance of the supply is
contracted annually from various suppliers, with many of whom PSE&G has dealt on
a continuing basis for a number of years, supplemented by spot market purchases.
PSE&G does not presently anticipate any difficulties in obtaining adequate coal
supplies.

PSE&G has approximately a 23% interest in the Keystone and Conemaugh
coal-fired generating stations located in Western Pennsylvania and operated by
Pennsylvania Electric Company. At least 71% of the fuel required by the Keystone
station is supplied by one coal company under a contract which expires December
31, 2004. At least 30% of the fuel required by Conemaugh station is supplied by
another coal company under a contract which expires on December 31, 1997. The
balance of the fuel requirements for each station is supplied through spot
purchases obtained from local suppliers. The Keystone Conemaugh Projects Office,
which runs project administration at these plants on a day to day basis, has
advised PSE&G that it does not presently anticipate any difficulties in
obtaining adequate coal supplies. (See Environmental Controls).

Natural Gas

PSE&G utilizes natural gas available from various spot and short-term gas
contracts, to replace other fuels for electric generation. Presently, there are
no legal restrictions on the use of natural gas for electric generation in
existing plants. PSE&G does not presently anticipate any difficulties in
obtaining natural gas supplies.

Oil

PSE&G uses residual oil in its conventional fossil-fired, steam-electric
units. The supply of residual oil is furnished by spot market purchases. PSE&G
uses distillate fuel in its combustion turbines which is also acquired by spot
market purchases. PSE&G does not presently anticipate any difficulties in
obtaining oil supplies.

Nuclear Fuel Disposal

After spent fuel is removed from a nuclear reactor, it is placed in
temporary storage for cooling in a spent fuel pool at the nuclear station site.
Under NWPA, the Federal government has entered into contracts for transportation
and ultimate disposal of the spent fuel. The Federal government's present policy
is that spent nuclear fuel will be accepted for storage and disposal at
government-owned and operated repositories. However, at present, no such
repositories are in service or under construction. The U.S. Department of Energy
(DOE) has announced that it will not be able to open a permanent, high-level
nuclear waste storage repository until 2010, at the earliest. However, the DOE
has also indicated that progress on the repository would be delayed beyond 2010
if sufficient funds, though available in the Nuclear Waste Fund, are not
appropriated by the Congress for this program.

In conformity with the NWPA, PSE&G entered into contracts with the DOE for
the disposal of spent nuclear fuel from Salem and Hope Creek. Similarly, PECO
contracted with the DOE in connection with Peach Bottom 2 and 3. Under these
contracts, the DOE is required to take title to the spent fuel at the site, then
transport it and provide for its permanent disposal at a cost of one mill per
KWH of nuclear generation, subject to such escalation as may be required to
assure full cost recovery by the Federal government. In addition, a one-time
payment was made to the DOE for permanently discharged spent fuels irradiated
prior to 1983.

On September 7, 1995, PSE&G, along with other utilities, filed a petition
for review of DOE's Final Interpretation on nuclear waste acceptance issues in
the U.S. District Court of Appeals for the District of Columbia Circuit. The
petition was consolidated with a similar petition by a group of 40 states and
state agencies. On July 23, 1996, the Court of Appeals ruled in favor of the
petitioners. The Court rejected DOE's interpretation of its statutory obligation
as contingent upon operation of a facility constructed under the NWPA and held
that the statutory obligation to commence spent nuclear fuel acceptance no later
than January 31, 1998 is "without qualification or condition". The Court further
held that the DOE has admitted an anticipatory breach of its statutory and
contractual obligation by announcing that DOE anticipates it will be unable to
begin acceptance of spent nuclear fuel for disposal or interim storage by
January 31, 1998. On January 31, 1997, a coalition of 36 electric utilities
including PSE&G filed a lawsuit in the U.S. District Court of Appeals for the
District of Columbia Circuit. This lawsuit asks the Court to order the utilities
to place payments to the Nuclear Waste Fund after February 1, 1998 into an
escrow account, and not provide these funds to the DOE until it fulfills its
obligations. In addition to the utilities' suit, 46 state agencies have filed a
similar combined lawsuit against the DOE.

Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be
stored in reactor facility storage pools or in independent spent fuel storage
installations located at reactor or away-from-reactor sites for at least 30
years beyond the licensed life for reactor operation (which may include the term
of a revised or renewed license).

As a result of reracking the two spent fuel pools at Salem, the
availability of adequate spent fuel storage capacity is estimated through 2008
for Salem 1 and 2012 for Salem 2, prior to losing an operational full core
discharge reserve. The current shutdown of the Salem Units is expected to extend
these dates further by a few years. The Hope Creek pool is also fully racked and
it is expected to provide storage capacity until 2006, again prior to losing an
operational full core discharge reserve. The units can be safely operated for
many years beyond these dates, as pool storage capacity is expected to continue
to be available. In addition, PECO has advised PSE&G that spent fuel racks at
Peach Bottom have storage capacity until 2000 for Unit 2 and 2001 for Unit 3,
prior to losing full core reserve capability, and that expansion of storage
capacity beyond such dates is being investigated.

Low Level Radioactive Waste (LLRW)

As a by-product of their operations, nuclear generating units, including
those in which PSE&G owns an interest, produce LLRW. Such wastes include paper,
plastics, protective clothing, water purification materials and other materials.
Such materials are accumulated on site and disposed of at a federally licensed
permanent disposal facility in Barnwell, South Carolina.

In 1991, New Jersey enacted legislation providing for funding of the
estimated $90 million cost of establishing a LLRW disposal facility. New Jersey
would recover the costs through fees paid by LLRW generators. PSE&G's overall
share is expected to be about 40% of the total cost and has provided about $4.8
million to date. New Jersey has introduced a volunteer siting process to
establish a LLRW disposal facility by the year 2000. Public meetings have been
held across the state in an effort to provide information to and obtain feedback
from the public. To date, there have been no voluntary sites identified.

Because of the uncertainties regarding disposal, PSE&G built an on-site
facility which was completed in September 1994. This facility provides five
years of storage for LLRW from Hope Creek and Salem. The facility was used from
July 1994 through June 1995, while the Barnwell facility was temporarily
unavailable, and emptied when Barnwell re-opened in 1995. It will be used for
interim storage of radioactive materials and waste, and if it proves necessary
in the future, to temporarily store waste until New Jersey provides a permanent
disposal facility.

PECO has advised PSE&G that it has an on-site LLRW storage facility for
Peach Bottom, which will provide at least 5 years of temporary storage. PECO has
also advised PSE&G that Pennsylvania is pursuing its own LLRW site development
via state-selected candidate sites, along with a volunteer plan option.

Gas Operations and Supply

PSE&G supplies its gas customers principally with natural gas. PSE&G
supplements natural gas with purchased refinery/landfill gas and liquefied
petroleum gas produced from propane. The adequacy of supply of all types of gas
is affected by the nationwide availability of all sources for energy production.

As of December 31, 1996, the daily gas capacity of PSE&G was as follows:

Type of Gas Therms Per Day
- -------------------------------------- -----------------
Natural gas........................... 23,099,000
Liquefied petroleum gas............... 2,200,000
Refinery/landfill gas................. 323,000
=================
Total......................... 25,622,000
=================

About 40% of the daily gas capacity is high load factor natural gas and is
available every day of the year. The remainder comes from field storage,
liquefied natural gas, seasonal sales, contract peaking supply, propane and
refinery/landfill gas. PSE&G's total gas sold to and transported for its various
customer classes in 1996 was 3.9 billion therms which consisted of approximately
96% natural gas. Included in this amount is 1.6 billion therms of gas delivered
to customers under PSE&G's transportation tariffs and individual cogeneration
contracts. During 1996, PSE&G purchased approximately 3.3 billion therms of gas
for its combined gas and electric operations directly from natural gas producers
and marketers. These supplies were transported to New Jersey by PSE&G's four
interstate pipeline suppliers.

The majority of PSE&G's gas supply contracts expire at various times over
the next two to ten years. PSE&G does not presently anticipate any difficulty in
negotiating replacement contracts. Since the quantities of gas available to
PSE&G under its supply contracts are more than adequate in warm months, PSE&G
nominates part of such quantities for storage, to be withdrawn during the winter
season, under storage contracts with its principal suppliers. Underground
storage capacity currently is approximately 770 million therms. PSE&G does not
presently anticipate any difficulty in obtaining adequate supplies of natural
gas.

PSE&G's annual average cost of natural gas sendout is shown below:

Cents Per
Year Million BTU(a)
- ---------------------------- --------------
1996........................ 370.00
1995........................ 308.00
1994........................ 318.09

(a) Excludes contribution by PSE&G's electric operating units for a gas
reservation charge and natural gas refunds from suppliers.

Substantially all of PSE&G's gas sales are made under rates which are
currently designed to permit the recovery of projected increases in the cost of
natural gas and gas from supplemental sources, when compared to levels included
in base rates on a current annual basis. (See Note 3--Rate Matters of Notes.)

The demand for gas by PSE&G's customers is affected by customer
conservation, economic conditions, weather, the price relationship between gas
and alternative fuels and other factors not within PSE&G's control. Gas sold in
interstate commerce is now deregulated and is subject to market forces. FERC
actions have required pipeline customers, such as PSE&G, to convert their
pipeline sales contracts to transportation agreements and purchase natural gas
supplies directly from producers or other sellers of natural gas. This has
increased competition in the gas market by encouraging pipeline companies to act
as nondiscriminatory transporters of natural gas. PSE&G has taken advantage of
these actions to lower its overall gas costs through the displacement of higher
cost contract supplies with lower cost spot gas purchases and long-term producer
contract supplies (see Competitive Environment--State Regulation (Gas)).

PSE&G was able to meet all of the demands of its firm customers during the
1995-96 winter season and expects to continue to meet such energy-related
demands of its firm customers during the 1996-97 winter season. However, the
sufficiency of supply could be affected by several factors not within PSE&G's
control, including curtailments of natural gas by its suppliers, the severity of
the winter, the extent of energy conservation by its customers and the
availability of feedstocks for the production of supplements to its natural gas
supply.

Employee Relations

Enterprise has no employees. As of December 31, 1996, PSE&G employed 10,621
persons. Six-year collective bargaining agreements with all of its union groups,
representing 6,420 PSE&G employees expire on April 30, 2002. Also at December
31, 1996, EDHI and its subsidiaries employed 320 persons, of which 36 were
represented by unions. PSE&G, EDHI and their subsidiaries believe that they
maintain satisfactory relationships with their employees.

For information concerning the employee pension plan and other
postretirement benefits, see Note 1--Organization and Summary of Significant
Accounting Policies, Note 14--Postretirement Benefits Other Than Pensions and
Note 15--Pension Plan of Notes.

Environmental Controls

PSE&G, like most industrial enterprises, is subject to regulation with
respect to the environmental impacts of its operations, including air and water
quality control, limitations on land use, disposal of wastes, aesthetics and
other matters by various federal, regional, state and local authorities,
including the U.S. Environmental Protection Agency (EPA), the U.S. Department of
Transportation (USDOT), the New Jersey Department of Environmental Protection
(NJDEP), the New Jersey Department of Health, the BPU, the Interstate Sanitation
Commission, the Hackensack Meadowlands Development Commission, the Pinelands
Commission, the Delaware River Basin Commission (DRBC), the U.S. Coast Guard and
the U.S. Army Corps of Engineers. CEA and EGDC are also subject to similar
regulation with respect to operation of their facilities. (See EDHI)

Environmental laws generally require air emissions and water discharges to
meet specified limits. They also impose potential joint and several liability,
without regard to fault, on the generators of various hazardous substances to
manage these materials properly and to clean up property affected by the
production and discharge of such substances. Compliance with environmental
requirements has caused PSE&G to modify the day-to-day operation of its
facilities, to participate in the cleanup of various properties that have been
contaminated and to modify, supplement and replace existing equipment and
facilities. During 1996, PSE&G expended approximately $32 million for capital
related expenditures to improve the environment and comply with changing
regulations. It is estimated that PSE&G will expend approximately $24 million,
$22 million and $28 million in the years 1997 through 1999, respectively, for
such purposes. Such amounts are included in PSE&G's estimates of construction
expenditures. (See MD&A--Liquidity and Capital Resources.)

Preconstruction analyses and projections of the environmental impacts of
contemplated activities, discharges and emissions are frequently required by the
permitting agency. Before licensing approvals and permits are granted, the
agency usually requests a modeling analysis of the effects of a specific action,
and of its effect in combination with other existing and permitted activities,
and may request the applicant to address emerging environmental issues. Such
environmental reviews have caused delays in the proceedings for licensing
facilities and similar delays can be expected in the future.

The New Jersey Environmental Rights Act provides that any person may
maintain a court action against any other person to enforce, or to restrain the
violation of any statute, regulation or ordinance which is designed to prevent
or minimize pollution, impairment or destruction of the environment, or where no
such violation exists, to protect the environment from pollution, impairment or
destruction. Certain Federal legislation confers similar rights on individuals.
The principal laws and regulations relating to the protection of the environment
which affect PSE&G's operations are described below.

Air Pollution Control

The Federal Clean Air Act (CAA) imposes emission control requirements,
including requirements related to the emissions of sulfur dioxide (SO2) and NOx
and requires attainment of National Ambient Air Quality Standards (NAAQS). The
CAA also requires that each major facility apply for and receive a facility wide
operating permit. The facility wide operating permit terms and conditions are
enforceable by both the EPA and NJDEP. PSE&G filed permit applications for its
major facilities in New Jersey in 1995. The operating permit program will
require some PSE&G facilities to assess emissions, which could require the
installation of emission monitoring equipment and changes to facility operations
of technology.

PSE&G also has approximately a 23% interest in Conemaugh and Keystone,
coal-fired generating stations located in western Pennsylvania. With respect to
Conemaugh, in order to comply with the CAA SO2 requirements, scrubbers (flue gas
desulfurization systems) have been installed. Keystone is presently expected to
comply with the SO2 requirements by utilizing excess emission allowances from
the over-scrubbing of the fuel supply of the Conemaugh units.

In New Jersey, NJDEP is using the New Jersey Air Pollution Control Code
(NJAPCC) to achieve compliance with, and maintenance of, the NAAQS. The NJAPCC
provides stringent requirements restricting the sulfur content in coal and oil
fuels.

To the extent estimates of the capital costs of complying with CAA
requirements through the year 2001 are quantifiable, they are included in
PSE&G's construction expenditures (see Construction and Capital Requirements).
In addition, the revised CAA requirements will increase the cost of producing
electricity for the Pennsylvania and Ohio Valley Region generating units
supplying electricity to the PJM and New Jersey.

In non-attainment areas, one of the effects of the CAA is to allow
construction or expansion of a facility only upon a showing that any additional
emissions from the source will be more than offset by reductions in similar
emissions from existing sources. In prevention of significant deterioration
areas, new construction or major expansion of a facility would be permitted only
if emissions from the source, together with emissions from other expected new
sources, would not violate air quality increments for particulates and sulfur
dioxide that are more stringent than NAAQS. All of these requirements may affect
PSE&G's ability to locate, construct or expand generating facilities in the
future.

PSE&G has been working collaboratively with environmentalists, a select
number of other electric utilities in the Northeast, NJDEP and other Northeast
environmental regulators, EPA and a number of large manufacturing companies to
achieve significant emission reductions from power plants in the Midwest. The
achievement of significant emission reductions from Midwest power plants is
expected to improve the Northeast's air quality, thereby lessening the need for
additional New Jersey emission controls over and beyond those already in effect.

These collaborative efforts, coupled with growing environmental regulator
and industry concerns for cost-effective compliance with CAA requirements, have
resulted in the creation of a thirty-seven state environment forum called Ozone
Transport Assessment Group (OTAG). This includes Midwest, Northeast and Southern
states east of the Mississippi River. OTAG's charter is to produce consensus
recommendations concerning the need for additional emission controls and to
identify the level and sources to which those controls should be applied. OTAG
is expected to conclude its work by the Spring of 1997.

The issue of transported air pollution from the Midwest power plants and
their negative impact on air quality in the Northeast has become the subject of
concern before the FERC. The FERC performed a draft environmental impact
statement to assess the environmental impact of developing its Order No. 888 by
which electric utilities will be required to provide full nondiscriminatory
transmission access to all wholesale power providers. PSE&G and a number of
other utilities, environmental groups and regulators submitted comments seeking
FERC's mitigation of expected additional power plant emissions resulting from
the implementation of Order No. 888 (see Competitive Environment--Federal
Regulation (Electric)). The results of such studies and its effect on New Jersey
are currently being assessed within the draft Phase II report.

CEA Eagle Point, Inc. (Eagle Point), an indirect subsidiary of CEA, is one
partner in a partnership which owns the Eagle Point Cogeneration Facility (EPC),
located in West Deptford, New Jersey. EPC is operated by an affiliate of Eagle
Point's partner and provides electricity and steam for an adjacent petroleum
refinery (owned and operated by another affiliate of Eagle Point's partner) and
sells excess electricity to PSE&G. In 1995, Eagle Point received a Notice of
Violation (NOV) from Region II of EPA alleging violations of certain CAA
requirements and limitations related to the air permit at EPC and the adjacent
refinery and demanding that such violations be corrected. Eagle Point, its
partner and the operator of the refinery are contesting the EPA conclusion that
violations have occurred and have met with staff of EPA and NJDEP to discuss
issues related to the NOV. As a result of discussions with NJDEP, Eagle Point
received a modified air permit from NJDEP during January 1997. No further action
was taken by EPA during 1996. Applicable regulations provide EPA with the power
to seek to collect criminal and civil penalties for continued violation of the
provisions of air permits.

Water Pollution Control

The Federal Water Pollution Control Act (FWPCA) authorizes the imposition
of technology and water-quality based effluent limitations to regulate the
discharge of pollutants into the surface waters of the United States through the
issuance of National Pollutant Discharge Elimination System (NPDES) permits. The
New Jersey Water Pollution Control Act (NJWPCA) authorizes the NJDEP to regulate
discharges to surface waters and ground waters of the State through the New
Jersey Pollutant Discharge Elimination System (NJPDES) permits. NJDEP also
administers the NPDES/NJPDES permit program. Certain PSE&G facilities are
directly regulated by NJPDES permits issued pursuant to FWPCA and the NJWPCA.

The FWPCA also authorizes the imposition of less stringent thermal limits
pursuant to a variance procedure set forth in its Section 316(a) and the
regulation of cooling water intake structures pursuant to its Section 316(b).
PSE&G has filed information with the NJDEP in support of Section 316(a) variance
requests and Section 316(b) best technology available determinations for several
of its electric generating stations which are pending before the NJDEP presently
and may be required to submit information for other stations as a result of the
permit renewals. With respect to Section 316(b) requirements, pursuant to a
court order, the EPA must propose draft regulations on or before July 1999 and
promulgate final regulations by August 2001. While the content and scope of
these regulations cannot be predicted at this time, they may have a considerable
effect on agency review of section 316(b) determinations pending in 1999 or
after.

A brief discussion on pending permit proceedings at the Hudson and Mercer
Stations which have the potential to impose new or more stringent terms or
conditions which could require changes to operations or significant expenditures
follows:

Hudson Station's NJPDES permit is in the process of being renewed by the
NJDEP. As part of that renewal, the NJDEP has requested updated information in
connection with PSE&G's 316(a) and 316(b) demonstrations, in part, to address
issues identified by a consultant hired by NJDEP. The consultant recommended
that Hudson be retrofitted to operate with closed cycle cooling to address
alleged adverse impacts associated with the thermal discharge and intake
structure. PSE&G is in the process of collecting additional data which will be
used in the updated demonstrations. PSE&G anticipates submitting these documents
to NJDEP in the second quarter of 1998. While it is impossible to predict the
NJDEP's determinations on these demonstrations, PSE&G presently estimates that
the cost of retrofitting Hudson to operate with closed cycle cooling could be in
excess of $60 million in 1998 dollars.

NJDEP has advised PSE&G that it is preparing a renewal permit for Mercer
Station and, in connection with that renewal, will also be reexamining Mercer's
compliance with Section 316(a) and 316(b). This may result in PSE&G's being
required to submit updated 316(a) and 316(b) demonstrations for NJDEP review. It
is impossible to predict at this time the outcome of such review.

PSE&G is implementing the 1994 NJPDES permit issued for Salem Station which
requires, among other things, water intake screen modifications and wetlands
restoration. In addition, PSE&G is seeking the final permits and approvals from
various agencies needed to fully implement the special conditions of the permit.
No assurances can be given as to receipt of such additional permits or
approvals. The estimated capital cost of compliance with the final permit is
approximately $100 million, of which approximately $40 million remains to be
spent. PSE&G's share is 42.59% and is included in its 1997-2001 construction
program. PSE&G must apply to renew the Salem permit in March 1999 and must
provide updated Section 316(a) and 316(b) demonstrations for the NJDEP's review
(see the discussion above regarding EPA's Section 316(b) rulemaking). (See
MD&A--Liquidity and Capital Resources--Construction, Investments and Other
Capital Requirements Forecast.)

In 1995, the DRBC approved PSE&G's application seeking a modification to
the heat dissipation area previously established based upon the NJDEP's grant of
a Section 316(a) variance for Salem Station. PSE&G must reapply to the DRBC in
1999 for a continuation of this heat dissipation area.

NJDEP is expected to issue a draft renewal permit for Hope Creek Station in
1997.

Control of Hazardous Substances

PSE&G Manufactured Gas Plant Remediation Program

For information regarding PSE&G's Manufactured Gas Plant Remediation
Program, see Note 13--Commitments and Contingent Liabilities of Notes.

Other Sites

A preliminary review of possible mercury contamination at the Kearny
Station concluded that an additional study and investigations are required. In
1995, PSE&G entered into a Memorandum of Agreement (MOA) with NJDEP for the
Kearny Generating Station pursuant to which PSE&G will conduct a Remedial
Investigation (RI) of the site. A Remedial Investigation Work Plan has been
approved by the NJDEP and field work activities associated with the RI commenced
in December 1996. It is anticipated that an RI Report will be submitted to the
NJDEP in August 1997.

Hazardous Substances

The Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and
Reauthorization Act of 1986 and the Federal Resource Conservation and Recovery
Act of 1976 (RCRA), authorize EPA to issue orders and/or to bring an enforcement
action to compel responsible parties to take investigative and/or cleanup
actions at any site that is determined to present an imminent and substantial
danger to the public or to the environment because of an actual or threatened
release of one or more hazardous substances. The New Jersey Spill Compensation
and Control Act (Spill Act) provides similar authority to NJDEP. Because of the
nature of PSE&G's business, including the production of electricity, the
distribution of gas and, formerly, the manufacture of gas, various by-products
and substances are or were produced or handled which contain constituents
classified as hazardous under one or more of the above laws.

PSE&G generally provides for the disposal or processing of such substances
through licensed independent contractors. However, the foregoing statutory
provisions impose joint and several liability without regard to fault on all
allegedly responsible parties, including the generators of the hazardous
substances, for certain investigative and cleanup costs at sites where these
substances were disposed or processed. These statutes also authorize private
rights of action for recovery of these costs.

PSE&G has been notified with respect to a number of such sites and the
cleanup of these potentially hazardous sites is receiving greater attention from
the government agencies involved. Generally, actions directed at funding such
site investigations and cleanups include suspected or known allegedly
responsible parties. PSE&G's past operations suggest that some remedial action
may be required. PSE&G does not expect its expenditures for any such site to
have a material effect on its financial position, results of operations or net
cash flows.

EPA has determined that a portion of the Passaic River from a point at its
confluence with the Hackensack River to a point six miles up-river (Site) is a
"facility" within the meaning of that term as defined under CERCLA. EPA has also
determined that five corporations are persons within the meaning of CERCLA for
purposes of liability under CERCLA with respect to remedial actions at the Site.
EPA has publicly indicated that it is continuing an assessment of available
information with respect to the identification of other responsible parties. One
of these corporations has entered into a consent order with EPA pursuant to
which it is obligated to conduct a remedial investigation, human and ecological
risk assessment and feasibility study relating to the Site. Field work
activities associated with these actions were initiated in the spring of 1995. A
report presenting the results of the remedial investigation and risk assessment
is scheduled to be filed in the fall of 1997.

In April 1996, EPA directed that PSE&G provide information concerning the
nature and quantity of hazardous substances and/or wastes which may have been
generated, treated, stored or disposed of at two PSE&G facilities located
adjacent to the Passaic River Site. The two facilities are PSE&G's former
Harrison Gas Plant and Essex Generating Station. CERCLA provides that EPA is
authorized to direct any person to submit such information if there is a
reasonable basis to believe that a release of a hazardous substance occurred at
a subject facility. PSE&G submitted its response to the EPA's request for these
facilities in August 1996.

PSE&G and certain of its predecessors conducted operations at properties
along the Passaic River both within and outside the Site. EPA has not named
PSE&G as a responsible party. PSE&G cannot predict what, if any, action EPA or
others may take against PSE&G with respect to the Site or, in such event, what
contributions PSE&G may be required to make to the costs of these initiatives.

Presently, other CERCLA/Spill Act actions involving PSE&G include the
following:

(1) Claim made in 1985 by U. S. Department of the Interior under CERCLA
with respect to the Pennsylvania Avenue and Fountain Avenue municipal
landfills in Brooklyn, New York for damages to natural resources. The
U.S. Government alleges damages of approximately $200 million. To
PSE&G's knowledge, there has been no action on this matter since 1988.

(2) Claim by EPA, Region III, under CERCLA with respect to a site operated
by Sealand Ltd. in Mount Pleasant Township, New Castle County,
Delaware. In 1996, EPA issued a five-year review report recommending
that deletion of the site from the superfund list. The State of
Delaware has initiated a separate action against PSE&G and other PRPs
under the Delaware Hazardous Substance Cleanup Act, alleging on-going
threats to human health and the environment due to the presence of
soil and groundwater contamination at the Sealand Site. Delaware is
presently contemplating requiring the PRPs to conduct additional
monitoring at the Sealand Site and to reimburse Delaware for past and
future oversight costs.

(3) Duane Marine Salvage Corporation Superfund Site is in Perth Amboy,
Middlesex County, New Jersey. Based upon the claims made and
activities taken to date, PSE&G anticipates that its obligations with
respect to this site will be de minimis.

(4) Various Spill Act directives were issued by NJDEP to PRPs, including
PSE&G, with respect to the PJP Landfill in Jersey City, Hudson County,
New Jersey ordering payment of costs associated with operating and
maintenance expenses, interim remedial measures and on a Remedial
Investigation and Feasibility Study (RI/FS) in excess of $25 million.
The directives also sought reimbursement of NJDEP's past and future
oversight costs and the costs of any future remedial action. Based
upon the claims made and actions taken to date, PSE&G anticipates that
its obligations with respect to this site will be de minimis.

(5) Claim by EPA, Region III, under CERCLA with respect to a Superfund
Site in Philadelphia, Pennsylvania, owned and formerly operated by
Metal Bank, Inc., as a non-ferrous scrap reclamation facility. PSE&G,
together with several other utilities, is alleged to be liable either
to conduct an RI/FS and undertake the necessary cleanup, if any, or to
reimburse EPA for the cost of performing these functions.. In July
1995, the EPA issued its Proposed Remedial Action Plan (PRAP) for the
site. The PRAP details the EPA's intention to select a remedy that
will cost between $17 and $30 million. It is anticipated that EPA will
assert a claim against PSE&G and the other utility companies, and
perhaps others as well, for the performance or funding of the selected
remedy. PSE&G's share of the costs of the proposed remedy is between
$4 and $8 million.

(6) The Klockner Road site is located in Hamilton Township, Mercer County,
New Jersey and occupies approximately two acres on PSE&G's Trenton
Switching Station property. PSE&G has entered into a Memorandum of
Agreement (MOA) with the NJDEP for the Klockner Road site pursuant to
which PSE&G will conduct an RI/FS and remedial action, if warranted,
of the site. Preliminary investigations indicated the potential
presence of soil and groundwater contamination at the site. PSE&G's
preliminary estimate is that the RI/FS will cost approximately
$800,000. The cost of any remediation of potential site contamination
is not presently estimable.

(7) In U.S. v. CDMG Realty Co., et al., Civil Action No. 89-4246 (NHP)
(RJH), pending in the U.S. District Court for the District of New
Jersey, PSE&G and over 60 other entities were joined in January 1995
as additional third-party defendants. Third-party plaintiffs, an
association of 44 entities, are essentially seeking contribution
and/or indemnification for the expenses they have incurred and will
incur as a result of having settled the direct claims of the NJDEP and
EPA related to the investigation and remediation of Sharkey's
Landfill, located in Parsippany-Troy Hills, Morris County, New Jersey.
The claims are all alleged to be brought pursuant to CERCLA and PSE&G
is alleged to have arranged for the disposal of industrial wastes at
Sharkey's Landfill. The claims with respect to this matter are
presently the subject of an alternative dispute resolution proceeding.
Based upon the claims made and activities to date, PSE&G estimates
that its obligations for this site will be de minimis.

(8) In 1991, the NJDEP issued Directive and Notice to Insurers Number Two
(Directive Two) to 24 Insurers and 52 Respondents, including PSE&G in
connection with an investigation and remediation of the Global
Landfill Site in Old Bridge Township, Middlesex County, New Jersey
(Global Site). Directive Two seeks recovery of past and anticipated
future NJDEP response costs ($37.4 million). PSE&G's alleged liability
is based on assertions that it generated asbestos-containing materials
which were disposed of at the Global Site. In 1991, PSE&G entered into
an agreement with the NJDEP and 29 other Directive Two Respondents
effecting a partial settlement of the foregoing costs subject to a
subsequent reallocation based upon the parties' further development of
information concerning their respective proportionate waste
contributions to the Global Site. Negotiations are ongoing regarding
resolution of the balance of the response costs sought pursuant to
Directive Two. In 1993, the NJDEP and various participating PRPs,
including PSE&G, executed a Consent Decree whereby the participating
PRPs agreed to perform the remedial design and remedial action for the
operable unit one remedy as specified in a 1991 ROD (approximate total
cost $30 million). The Consent Decree was executed and entered by the
U.S. District Court for the District of New Jersey in 1993. Subject to
a subsequent reallocation, the various parties to the Consent Decree
have agreed that PSE&G's contribution under the Consent Decree
settlement will be $300,000 (approximately 1% of the total cost). In
October 1996, NJDEP issued a superfund proposed plan for the Global
Landfill Site Operable Unit #2.

(9) In 1991, the New Jersey Department of Law and Public Safety, Division
of Law, issued Directive and Notice To Insurers Number One (Directive
One) to 50 insurers and 20 respondents, including PSE&G, seeking from
the respondents payment of $5.5 million of NJDEP's anticipated costs
of remedial action and of administrative oversight at the Combe Fill
South Sanitary Landfill in Washington and Chester Townships, Morris
County, New Jersey (Combe Site). The $5.5 million represents the
NJDEP's 10% share of such anticipated costs pursuant to a cooperative
agreement with the United States regarding the selected remedial
action. Therefore, total site remediation costs approximate $50
million. Further, the Directive One respondents are directed to
perform the operation and maintenance of the remedial action including
all remedial facilities on the Combe Site. PSE&G's alleged liability
is based on the assertion that PSE&G-generated waste oil and water,
containing hazardous substances, was transported to the Combe Site and
applied to Combe Site roads for dust control. Based upon the claims
made in Directive One and PSE&G's investigation and response to same,
PSE&G anticipates that its obligations, if any, with respect to this
site will be de minimis. In December 1996, the NJDEP issued Directive
Number Two (Directive No. Two) to 37 respondents, including PSE&G,
directing the respondents to arrange for the operation, maintenance
and monitoring of the implemented remedial action described therein or
pay the Department's future costs of these activities, estimated to be
$39 million. In addition, the Directive No. Two directs the
respondents to prepare a workplan for the development and
implementation of a Natural Resource Damage Restoration Plan that
addresses the natural resource damages resulting from the discharge of
hazardous substances at the site. Since the bases of the claims made
against PSE&G in Directive No. Two are the same as those made in
Directive One, PSE&G continues to anticipate that its obligations, if
any, with respect to this site will be de minimis.

(10) In United States of America v. Superior Tube Company, et al., Docket
No. 89-7421 in the U.S. District Court for the Eastern District of
Pennsylvania, PSE&G was served in 1990 with a Third-Party Complaint.
Pursuant to CERCLA, the United States filed suit against Superior Tube
Company (Superior) and others seeking recovery of past and future
costs incurred or to be incurred in the cleanup of the Moyer Landfill
located in Collegeville, Pennsylvania. Superior filed a Third-Party
Complaint naming approximately 150 third-party defendants, including
PSE&G. Superior alleges that PSE&G generated, transported, arranged
for the disposal of and/or caused to be deposited certain hazardous
substances at the Moyer Landfill. On the basis of those allegations,
Superior seeks contribution and/or indemnification from the
third-party defendants, including PSE&G, on the United States' action
against it. PSE&G has participated in negotiations concerning
resolution of the United States' and Superior Tube's claims. Pursuant
to settlement negotiations among certain direct defendants, certain
third party defendants and the plaintiffs, the defending parties
participating in said negotiations are currently pursuing the
possibility of resolving all potential liability concerning the above
referenced matter (excluding any potential liability associated with a
future claim, if any, for natural resource damages) on behalf of
certain de minimis defending parties, including PSE&G. Based upon the
claims made and the above referenced negotiations, PSE&G anticipates
that its obligations with respect to this site will be de minimis.

(11) Spill Act Multi-Site Directive (Directive) issued by the NJDEP to
PRPs, including PSE&G, listing four separate sites, including the
former bulking and transfer facility called the Marvin Jonas Transfer
Station (Sewell Site) in Deptford Township, Gloucester County, New
Jersey. With regard to the Sewell Site, this Directive ordered
approximately 350 PRPs, including PSE&G, to enter into an ACO with
NJDEP, requiring them to remediate the Sewell Site. Certain PRPs,
including PSE&G, have completed the interim actions directed at both
site security and off-site disposal of containers, trailers and
contaminated surface soils. PRPs, including PSE&G, are currently
fulfilling the terms of a MOA entered into with NJDEP in 1993 to
conduct an RI/FS and, if necessary, take remedial action. Based upon
the claims made and activities taken to date, PSE&G anticipates that
its obligations with respect to this site will be de minimis.

(12) In Transtech Industries, Inc. et al v. A&Z Septic Clean et al., Docket
No. 2-90-2578(HAA), filed in August 1990, in the U.S. District Court
for the District of New Jersey, PSE&G has been named a defendant in a
Complaint which has been filed pursuant to CERCLA, against several
hundred parties seeking recovery of past and future response costs
incurred or to be incurred in the investigation and/or remediation of
the Kin-Buc Landfill, located in Edison Township, Middlesex County,
New Jersey. Plaintiffs allege that all named defendants, including
PSE&G, are PRPs as generators and/or transporters of various hazardous
substances ultimately deposited at the Kin-Buc Landfill. Based upon
the claims made and activities taken to date, PSE&G anticipates that
its obligations with respect to this site will be de minimis.

(13) In 1993, PSE&G acknowledged service of Plaintiff's Summons and
Complaint in a matter entitled The Fishbein Family Partnership v. PPG
Industries, Inc. and Public Service Electric and Gas Company. Pursuant
to CERCLA, the Spill Act and various common law theories of liability,
the Plaintiff filed an action seeking declaratory relief regarding
responsibility for and recovery of damages and response costs incurred
and/or to be incurred as a result of the release or threatened release
of hazardous substances at property located in Jersey City, Hudson
County, New Jersey. Plaintiff named PPG Industries, Inc. (PPG) and
PSE&G as defendants in the above-referenced action. The Plaintiff
alleges that defendants are liable for the damages and relief sought
based on their past conduct of industrial operations at the site. The
industrial operations referenced in Plaintiff's Complaint include
chromium ore processing operations (PPG and its predecessors) and coal
gasification operations (PSE&G and its predecessors). PSE&G filed its
response to the Plaintiff's Complaint including cross-claims for
indemnity and contribution against co-defendant PPG. PSE&G also filed
a Third Party Complaint against UGI Utilities, Inc. (UGI) seeking
indemnification and contribution as to any liability imposed upon
PSE&G attributable to UGI's past conduct of industrial operations on a
portion of the site. In March 1995, PSE&G filed an Amended Third Party
Complaint extending the time period of PSE&G's allegations concerning
UGI's past conduct of industrial operations at the site. In May 1995,
an Administrative Stay of this matter was entered pending either an
agreement between the NJDEP and PPG as to a cleanup plan for the site
or a determination of certain cross-motions for summary judgement
filed by Plaintiff and PPG. Following the court's determination of
Plaintiff's and PPG's cross-motions for summary judgement, the Court
in December 1996, entered an Order amending the Order of
Administrative Stay whereby Plaintiff's claims against PSE&G, all
cross-claims of PPG and PSE&G, and all claims in the third party
action were administratively stayed until further order of the court.
Based upon the claims made and activities taken to date, PSE&G's
potential liability in this matter, if any, is not currently
estimable.

(14) Morton International, Inc. and the Velsicol Chemical Corporation have
instituted separate suits (Morton International, Inc. v. A.E. Staley
Manufacturing Co., et al. Civil Action No. 96-3609 (NHP) and Velsicol
Chemical Corporation, et al. v. A.E. Staley Manufacturing Co., et al.
Civil Action No. 96-3610 (NHP)) in the U.S. District Court in Newark,
New Jersey against one hundred and seven (107) defendants, including
PSE&G. The suits are contribution actions pursuant to CERCLA and the
Spill Act seeking contribution for an equitable share of all liability
for response costs and damages that plaintiffs anticipate they will
incur in connection with the RI/FS and remedial action of a forty (40)
acre parcel of land in WoodRidge, Bergen County, New Jersey and
adjoining water body known as Berry's Creek. Plaintiffs have not
initiated any remedial actions to date either at the site or the
adjacent Creek. While plaintiffs anticipate that the costs of the
RI/FS and past and future NJDEP oversight costs will approximate $6
million, they have no current estimate of the costs for remediation of
the site and/or the RI/FS and remediation of the Creek. PSE&G's
alleged nexus to the site is based on shipments of quantities of
mercury from its Kearny Generating Station and other unnamed
facilities. Based on the claims made and the information available to
date, PSE&G's potential liability, if any, is not currently estimable.

(15) The USEPA issued a Notice of Potential Liability to approximately
twenty entities including PSE&G in 1996 with respect to a site in
Perth Amboy, New Jersey, formerly operated as a waste oil recovery
facility. Available information suggests that PSE&G may have shipped
waste oil to the facility for recycling. USEPA's notice advises that
is has completed a removal action at the site at a cost of slightly in
excess of $2 million and intends to seek to recover said costs from
those entities including PSE&G that received a Notice. Prospective
remedial actions, if any, have not been performed and/or identified.
PSE&G's liability, if any, for past and future response costs is not
currently estimable.

(16) The NJDEP assumed control of a former petroleum products blinding and
mixing operation and waste oil recycling facility in Elizabeth, New
Jersey and issued various directives to a number of entities including
PSE&G requiring performance of various remedial actions including:
establishment of security at the site; removal and off-site disposal
of containerized wastes at the site; and conduct of a remedial
investigation of the site. PSE&G's nexus to the site is based upon the
shipment of certain waste oils to the site for recycling. PSE&G and
certain of the other entities named in NJDEP directives are members of
a Potentially Responsible Party Group (PRP Group) that have been
working together to satisfy NJDEP requirements including: funding of
the site security program; containerized waste removal; and a site
remedial investigation program. Based on the nature and extent of
PSE&G's nexus to the site, PSE&G's liabilities to date have been de
minimis. While the cost of prospective remedial actions are not
currently estimable, PSE&G does not anticipate that its prospective
liabilities will be other than de minimis in nature.

Other Potential Liability

In addition to the sites individually listed above, PSE&G has received 14
claims and/or inquiries concerning prospective enforcement actions by the EPA
and/or NJDEP. Such claims/inquiries relate to alleged properties/sites where it
has been alleged that an imminent and substantial danger to the public or to the
environment exists as a result of an actual or threatened release of one or more
hazardous substances. PSE&G's investigation and initial response concerning each
such claim and/or inquiry suggests that PSE&G's potential liability, if any, is
de minimis.

EDHI

EDHI, a wholly owned, direct subsidiary of Enterprise, is incorporated
under the laws of New Jersey and is the parent company of CEA, PSRC, ERI, EGDC,
Capital and Funding. EDHI's principal executive offices are located at One
Riverfront Plaza, Newark, New Jersey 07102. EDHI's focus is on investment
opportunities in the non-utility energy market. For a discussion of Enterprise's
agreement with the BPU regarding utility/non-utility activities and its impact
on EDHI, see Competitive Environment--Other State Regulatory Matters.

CEA

CEA, a New Jersey corporation, has its principal executive offices at 1200
East Ridgewood Avenue, Ridgewood, New Jersey 07450. CEA invests and participates
in the development and operation of cogeneration, thermal and power production
facilities, which include domestic Qualifying Facilities (QFs), two foreign
Exempt Wholesale Generators (EWGs) and one foreign utility company. CEA is
expected to be a primary vehicle for EDHI's business growth for the foreseeable
future, with emphasis on international projects due to expected growth
opportunities. CEA's two direct subsidiaries, CEA New Jersey, Inc. (CEA New
Jersey) and CEA USA, Inc. (CEA USA), hold certain of its investments. CEA New
Jersey's subsidiaries invest in projects in New Jersey selling power to PSE&G.
CEA USA's subsidiaries invest in projects selling power to other domestic and
foreign entities. CEA and/or its subsidiaries and affiliates have investments in
22 commercially operating cogeneration or independent power projects, one
anthracite coal mine and one project under construction. CEA continuously
evaluates the status of project development and construction in light of the
realities of timely completion and the costs incurred.

CEA's investments in QF projects have been undertaken with other
participants because CEA, together with any other utility affiliate, may not own
more than 50% of a QF under applicable law subsequent to the in-service date.
Projects involving EWGs are not restricted to a 50% investment limitation. CEA's
projects are diversified internationally and technologically and are generally
financed through nonrecourse debt. CEA is an investor in partnerships and
corporate joint ventures which own these projects and the electricity produced
by the facilities is not part of PSE&G's installed capacity. However, some of
such power is being purchased by PSE&G pursuant to long-term contracts with the
applicable partnerships and corporate joint ventures.

As of December 31, 1996 and 1995, CEA's consolidated assets aggregated
$286 million and $271 million, respectively (see Note 8--Long-Term Investments
of Notes).

PSRC

PSRC, a New Jersey corporation, has its principal executive offices at One
Riverfront Plaza, Newark, New Jersey 07102. PSRC makes primarily passive
investments in assets that can provide funds for future growth as well as
provide incremental earnings for EDHI. Investments have been made in leveraged
and direct financing leases, project financings, venture capital funds,
leveraged buyout funds and securities. The maturities of the portfolio's
investments are also fairly diverse, with some having terms exceeding 30 years.
PSRC's leveraged lease investments include a wide range of asset sectors. Some
of the transactions in which PSRC and its subsidiaries participate involve other
equity investors.

PSRC is a limited partner in various partnerships and is committed to make
investments from time to time, upon the request of the respective general
partners. At December 31, 1996, $30 million remained as PSRC's unfunded
commitment subject to call. As of year end 1996 and 1995, PSRC's long-term
investments aggregated $1.4 billion.

ERI

ERI, a New Jersey corporation, has its principal executive offices at 499
Thornall Street, Edison, New Jersey 08837. ERI was established in 1996 and
provides a variety of energy related services to industrial and commercial
customers. ERI includes PSRC's former wholly-owned subsidiaries, U.S. Energy
Incorporated and Enterprise Strategic Energy Solutions. As of December 31, 1996
and 1995, ERI's assets were $47 million and $19 million, respectively, including
the assets of the former PSRC subsidiaries.

EGDC

EGDC, a New Jersey corporation having its principal executive offices at
One Riverfront Plaza, Newark, New Jersey 07102, is a nonresidential real estate
development and investment business. EGDC has investments in nine commercial
real estate properties (one of which is developed) in several states. EGDC's
strategy is to preserve the value of its assets to allow for the controlled
disposition of its properties as the real estate market improves. EGDC has been
conducting a controlled exit from the real estate business since 1993. As of
December 31, 1996 and 1995, EGDC's consolidated assets aggregated $108 million
and $116 million, respectively.

Capital

Capital, a New Jersey corporation, has its principal executive offices at
80 Park Plaza, Newark, New Jersey 07101. Capital serves as a financing vehicle
for EDHI's businesses (excluding ERI) borrowing on their behalf on the basis of
a minimum net worth maintenance agreement with Enterprise. That agreement
provides, among other things, that Enterprise (i) maintain its ownership,
directly or indirectly, of all outstanding common stock of Capital, (ii) cause
Capital to have at all times a positive tangible net worth of at least $100,000
and (iii) make sufficient contributions of liquid assets to Capital in order to
permit it to pay its debt obligations. Intercompany borrowing rates are
established based upon Capital's cost of funds. In 1993, Enterprise agreed with
the BPU to make a good-faith effort to eliminate such Enterprise support within
six to ten years. Per an agreement with the BPU, effective January 31, 1995,
Capital will not have more than $650 million of debt outstanding at any time.
Capital's assets consist principally of demand notes of EDC (1995 only), CEA and
PSRC. As of December 31, 1996 and 1995, Capital had debt outstanding of $415
million and $477.5 million, respectively. For additional information, see
Construction and Capital Requirements--Financing Activities and Liquidity and
Capital Resources--EDHI of MD&A.

Funding

Funding, a New Jersey corporation, has its principal executive offices at
80 Park Plaza, Newark, New Jersey 07101. Funding serves as a financing vehicle
for EDHI's businesses (excluding EGDC and ERI), borrowing on their behalf, as
well as investing their short-term funds. Short-Term investments are made only
if the funds cannot be employed in intercompany loans. Intercompany borrowing
rates are established based upon Funding's cost of funds. Funding is providing
both long and short-term capital for the non-utility businesses other than EGDC
and ERI on the basis of an unconditional guaranty from EDHI, but without direct
support from Enterprise. As of December 31, 1996 and 1995, Funding's assets
consisted of demand notes of EDC (1995 only), CEA and PSRC, all of which are
pledged to Funding's lenders and which aggregated $55 million and $492 million,
respectively, and short-term investments which aggregated $145 million as of
December 31, 1996. For additional information, see Liquidity and Capital
Resources--EDHI of MD&A.

Item 2. Properties

PSE&G

The statements under this Item as to ownership of properties are made
without regard to leases, tax and assessment liens, judgments, easements, rights
of way, contracts, reservations, exceptions, conditions, immaterial liens and
encumbrances and other outstanding rights affecting such properties, none of
which is considered to be significant in the operations of PSE&G, except that
PSE&G's First and Refunding Mortgage (Mortgage), securing the bonds issued
thereunder, constitutes a direct first mortgage lien on substantially all of
such property.

PSE&G maintains insurance coverage against loss or damage to its principal
plants and properties, subject to certain exceptions, to the extent such
property is usually insured and insurance is available at a reasonable cost. For
a discussion of nuclear insurance, see Note 13--Commitments and Contingent
Liabilities of Notes.

The electric lines and gas mains of PSE&G are located over or under public
highways, streets, alleys or lands, except where they are located over or under
property owned by PSE&G or occupied by it under easements or other rights. These
easements and rights are deemed by PSE&G to be adequate for the purposes for
which they are being used. Generally, where payments are minor in amount, no
examinations of underlying titles as to the rights of way for transmission or
distribution lines or mains have been made.

Electric Properties

As of December 31, 1996, PSE&G's share of installed generating capacity was
10,405 MW, as shown in the following table:

Net
Installed Principal Generation
Megawatt Fuel Heat (Thousands Capacity
Name and Location Capacity Used Rate of MWH) Factor(a)
- ---------------------------------------------------- --------- --------- -------- ---------- ---------

Steam
Burlington, Burlington, NJ.......................... 180 Oil 31,109 10 0.6
Conemaugh, New Florence, PA--22.50%(b)(c)........... 382 Coal 9,507 2,563 76.4
Hudson, Jersey City, NJ............................. 983 Coal 10,894 2,035 23.6
Kearny, Kearny, NJ.................................. 292 Oil 33,667 9 0.4
Keystone, Shelocta, PA--22.84%(b)(c)................ 388 Coal 9,561 2,884 84.6
Linden, Linden, NJ.................................. 415 Oil 65,694 8 0.2
Mercer, Hamilton, NJ................................ 642 Coal 10,342 1,934 34.3
Sewaren, Woodbridge Twp., NJ........................ 453 Gas 15,963 139 3.5
------- -------- ---------- ---------
Total Steam.................................... 3,735 10,173 9,794 29.2
------- -------- ---------- ---------
Nuclear (Capacity factor calculated in accordance
with
industries maximum dependable capability
standards)
Hope Creek, Lower Alloways Creek, NJ 95%(b)(c)...... 979 Nuclear 10,656 6,400 74.6
Peach Bottom 2, Peach Bottom, PA 42.49%(b).......... 465 Nuclear 10,881 3,228 79.8
Peach Bottom 3, Peach Bottom, PA 42.49%(b).......... 465 Nuclear 10,565 3,988 98.2
Salem 1, Lower Alloways Creek, NJ 42.59%(b)......... 471 Nuclear 0 (14) 0
Salem 2, Lower Alloways Creek, NJ 42.59%(b)......... 471 Nuclear 0 (16) 0
-------- -------- ---------- ---------
Total Nuclear(b)(c)............................ 2,851 10,843 15,593 54.6
-------- -------- ---------- ---------
Combined Cycle
Bergen, Ridgefield, NJ.............................. 650 Gas 8,274 1,150 20.1
Burlington, Burlington, NJ.......................... 240 Gas 9,417 205 9.7
-------- -------- ---------- ---------
Total Combined Cycle........................... 890 8,441 1,355 17.3
-------- -------- ---------- ---------
Combustion Turbine
Bayonne, Bayonne, NJ................................ 42 Oil 0 (0.1) 0.0
Bergen, Ridgefield, NJ.............................. 21 Gas 21,764 0.3 0.2
Burlington, Burlington, NJ.......................... 389 Oil 21,882 3.1 0.1
Edison, Edison Township, NJ......................... 504 Gas 15,293 19.9 0.4
Essex, Newark, NJ................................... 617 Gas 13,639 71.5 1.3
Hudson, Jersey City, NJ............................. 129 Oil 187,174 0.0 0.0
Kearny, Kearny, NJ.................................. 504 Gas 40,655 3.4 0.1
Linden, Linden, NJ.................................. 223 Gas 12,872 63.0 3.2
Mercer, Hamilton, NJ................................ 129 Oil 0 (0.1) 0.0
National Park, National Park, NJ.................... 21 Oil 0 0.0 0.0
Salem, Lower Alloways Creek, NJ 42.59%(b)........... 16 Oil 29,397 0.1 0.1
Sewaren, Woodbridge Township, NJ.................... 129 Oil 0 (0.1) 0.0
-------- -------- ---------- ---------
Total Combustion Turbine....................... 2,724 14,581 161.0 0.7
-------- -------- ---------- ---------
Internal Combustion
Conemaugh, New Florence, PA--22.50%(b)............... 3 Oil 10,148 0.3 1.1
Keystone, Shelocta, PA--22.84%(b).................... 2 Oil 10,392 0.5 2.8
-------- -------- ---------- ---------
Total Internal Combustion...................... 5 10,303 0.8 1.8
-------- -------- ---------- ---------
Pumped Storage
Yards Creek, Blairstown, NJ--50%(b)(c)............... 200 -- 316 18.0
======== ======== ========== =========
Total PSE&G.................................... 10,405 (d) 10,402 25,001 (e) 27.4
======== ======== ========== =========

(a) Net generation divided by the product of weighted average generating
capacity times total hours.
(b) PSE&G's share of jointly owned facility.
(c) Excludes energy for pumping and synchronous condensers.
(d) Excludes 664 MW of non-utility generation and 115 MW of capacity sales to
ACE, DP&L, and GPU.
(e) Excludes 4,960 (thousands of MWH) of non-utility generation.

For information regarding construction see MD&A--Construction and Capital
Expenditures.

In addition to the generating facilities in New Jersey and Pennsylvania as
indicated in the table above, as of December 31, 1996, PSE&G owned 41 switching
stations with an aggregate installed capacity of 30,980,000 kilovolt-amperes,
and 222 substations with an aggregate installed capacity of 7,276,000
kilovolt-amperes. In addition, 7 substations having an aggregate installed
capacity of 115,250 kilovolt-amperes were operated on leased property. All of
these facilities are located in New Jersey.

As of December 31, 1996, PSE&G's transmission and distribution system
included 151,612 circuit miles, of which 36,793 miles were underground, and
791,644 poles, of which 534,831 poles were jointly owned. Approximately 99% of
this property is located in New Jersey.

In addition, as of December 31, 1996, PSE&G owned four electric
distribution headquarters and five subheadquarters in four operating divisions
all located in New Jersey.

Gas Properties

As of December 31, 1996, the daily gas capacity of PSE&G's 100%-owned
peaking facilities (the maximum daily gas delivery available during the three
peak winter months) consisted of liquid petroleum air gas (LPG) and liquefied
natural gas (LNG) and aggregated 2,973,000 therms (approximately 297,300 Mcf. on
an equivalent basis of 1,000 Btu/cubic foot) as shown in the following table:

Daily Capacity
Plant Location (Therms)
----- -------------- -----------------

Burlington LNG................ Burlington, NJ 773,000
Camden LPG.................... Camden, NJ 280,000
Central LPG................... Edison Twp., NJ 960,000
Harrison LPG.................. Harrison, NJ 960,000
=================
Total.................... 2,973,000
=================

As of December 31, 1996, PSE&G owned and operated approximately 15,833
miles of gas mains, owned 11 gas distribution headquarters and two
subheadquarters and leased one other subheadquarters all in two operating
regions located in New Jersey and owned one meter shop in New Jersey serving all
such areas. In addition, PSE&G operated 61 natural gas metering or regulating
stations, all located in New Jersey, of which 28 were located on land owned by
customers or natural gas pipeline companies supplying PSE&G with natural gas and
were operated under lease, easement or other similar arrangement. In some
instances, portions of the metering and regulating facilities were owned by the
pipeline companies.

Office Buildings and Facilities

PSE&G leases substantially all of a 26-story office tower for its corporate
headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining
three-story building. PSE&G also leases other office space at various locations
throughout New Jersey for district offices and offices for various corporate
groups and services. PSE&G also owns various other sites for training, testing,
parking, records storage, research, repair and maintenance, warehouse facilities
and for other purposes related to its business.

EDHI

EDHI owns no real property. EDHI leases its corporate headquarters at One
Riverfront Plaza, Newark, New Jersey. For a brief general description of the
properties of the subsidiaries of EDHI, see Item 1. Business--EDHI.

Item 3. Legal Proceedings

As previously reported, four shareholder derivative action civil complaints
have been filed against Enterprise and certain of its directors and officers
seeking to recover unspecified damages for alleged losses purportedly arising
out of PSE&G's operations of Salem and Hope Creek. Three of these actions have
been consolidated and a case management order to deal with discovery and motions
has been issued. The defendants filed motions to dismiss these proceedings,
which motions were denied in January 1997. Also, in January 1997, the defendants
filed motions for leave to appeal the trial court's denial of their motions to
dismiss, which are still pending.

Also previously reported, PSE&G and the three other co-owners of Salem
filed suit in February 1996 in the U.S. District Court for the District of New
Jersey against Westinghouse Electric Corporation (Westinghouse) seeking damages
to recover the cost of replacing the steam generators at Salem Units 1 and 2.
The suit alleges fraud and breach of contract by Westinghouse in the sale,
installation and maintenance of the generators. In April 1996, Westinghouse
filed an answer and $2.5 million counterclaim for unpaid work related to
services at Salem. PSE&G cannot predict the outcome of these proceedings.

Also previously reported, PECO and DP&L as co-owners of Salem have filed a
lawsuit in March 1996 against Enterprise and PSE&G in the U.S. District Court
for the Eastern District of Pennsylvania alleging mismanagement by PSE&G in its
operation of Salem and are seeking unspecified compensatory and punitive
damages. PSE&G's answer in this matter has been filed and discovery is
proceeding. While PSE&G cannot predict the outcome of this proceeding, PSE&G
believes it has operated Salem in accordance with the requirements of the owners
agreement and applicable law and that it has substantial and valid defenses to
this claim. On July 30, 1996, the Federal District Court issued an Order
scheduling discovery and setting a trial for May 1997.

ACE also filed a similar suit in March 1996 against Enterprise and PSE&G in
the New Jersey Superior Court. PSE&G and ACE, a 7.41% owner of Salem Units 1 and
2, have entered into an agreement (Agreement) to dismiss ACE's lawsuit alleging
mismanagement in the operation of Salem by PSE&G. Under the terms of the
Agreement, ACE's exposure for 1997 operation and maintenance (O&M) costs for
Salem will be limited to a fixed charge of $10 million, plus certain
performance-based additional amounts, up to a maximum of $21.8 million,
depending upon the capacity factors for the Salem Units 1 and 2 for 1997. The
cost of the settlement to PSE&G will depend upon actual performance of the Salem
Units. Budgeted O&M costs for Salem for 1997 are $293.9 million of which ACE's
7.41% share approximates $21.8 million. Under the terms of the Agreement, for
ACE to be responsible to pay the maximum amount, Unit 1 would have to return to
service on July 1, 1997, Unit 2 would have had to return to service on January
1, 1997 and each unit would have to operate at an 80% capacity factor from such
respective dates for the remainder of 1997.

During the past 10 years, the average annual capacity factor of the Salem
units has been 68.1% for Unit 1 and 61.1% for Unit 2. In the last year of
operation prior to the current Salem shutdown (1994) the operating capacity
factor was 59.3% for Unit 1 and 57.8% for Unit 2.

In the event that the actual 1997 Salem O&M expenses exceed the budgeted
amount of $293.9 million, ACE will not be responsible for its 7.41% share of any
such excess O&M costs unless (i) the excess O&M is directly attributable to
requirements imposed by the NRC or other governmental agencies having
jurisdiction over Salem, (ii) notice from the NRC or such agency is received by
PSE&G after the effective date of the Agreement (12/31/96) and (iii) the notice
is generically applicable to all similar nuclear plants. Certain other
extraordinary events giving rise to additional O&M expenses have also been
excluded from the Agreement.

The Agreement applies only to calendar year 1997 and does not apply to any
damages which may be alleged by ACE to continue beyond or be incurred after
December 31, 1997; and does not apply to ACE's rights under the Salem Owners
Agreement to review and approve capital projects during 1997; which, in each
instance, will continue to be governed by the terms and conditions of the Salem
Owners Agreement and the rights and obligations of ACE and PSE&G at law or in
equity. The settlement is subject to receipt of a Court Order, which has been
applied for, confirming that dismissal of the ACE litigation will not prejudice
either party in certain other litigation involving Salem.

In addition, see the following at the pages indicated:

(1) Page 2. Proceedings before FERC relating to competition and electric
wholesale power markets. (Inquiry Concerning the Pricing Policy for
Transmission Services Provided by Utilities Under the Federal Power
Act, Docket No. RM93-19.)

(2) Page 18. Administrative proceedings before the NJDEP under Section 316 of
the FWPCA for certain elective generating stations.

(3) Page 17. Notice of Violation issued by EPA against Eagle Point
Cogeneration Partnership regarding alleged violations of air permit.

(4) Pages 19 through 23 and 78. Various administrative actions, claims,
litigation and requests for information by federal and/or state agencies,
and/or private parties, under CERCLA, RCRA, and state environmental laws to
compel PRPs, which may include PSE&G, to provide information with respect
to transportation and disposal of hazardous substances and wastes, and/or
to undertake or contribute to the costs of investigative and/or cleanup
actions at various locations because of actual or threatened releases of
one or more potentially hazardous substances and/or wastes.

(5) Page 61. Proceedings before the BPU relating to recovery of replacement
power costs in connection with the April 1994 Salem 1 shutdown, Docket No.
ER94070293.

(6) Page 61. Generic proceeding before the BPU relating to recovery of capacity
costs associated with power purchases from cogenerators, Docket No.
EX93060255

(7) Page 63. Generic proceedings before the BPU relating to standards for
"off tariff" negotiated rate agreement programs, Docket No. EX95070320.

(8) Page 62. Proceedings before the BPU relating to PSE&G's LGAC filed
July 30, 1996, Docket No. GR96070554.

(9) Page 62. Proceedings before the BPU relating to PSE&G's RAC filed
July 30, 1996, Docket No. GR96070555.

(10) Page 63. Generic proceeding before the BPU relating to the matter of an
inquiry into methods of implementation of SFAS-106, Docket No. AX96070530.

(11) Page 63. Proceedings before the BPU relating to PSE&G's proposed CTC filed
September 19, 1996, Docket No. ET96090669.

(12) Page 63. Proceedings before the BPU relating to PSE&G's first Off Tariff
Rate Agreement (OTRA), Docket No. OTRA-96-1.

(13) Page 28. Derivative actions related to nuclear operations and Salem Station
shutdown, Public Service Enterprise Group Inc. by G. E. Stricklin,
derivatively v. E. James Ferland, et. al., Docket No. L1068395, Superior
Court of New Jersey, Law Division, Camden County. Dr. Steven Fink and
Dr. David Friedman, P.C. Profit Sharing Plan, derivatively, et. al. v.
Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery
Division, Essex County, Docket No. C-65-96. A. Harold Datz Pension and
Profit Sharing Plan derivatively, et. al., v. Lawrence R. Codey, et. al.,
Superior Court of New Jersey, Chancery Division, Essex County, Docket No.
C-68-96.

(14) Page 28. Suit filed by co-owners of Salem against Westinghouse. PSE&G,
et. al., v. Westinghouse Electric Corporation, United States District Court
for the District of New Jersey, Civil Action No. CB-96-925.

(15) Page 28. Lawsuits by the co-owners of Salem against Public Service
Electric and Gas Company. PECO Energy Company, and Delmarva Public &
Light Company v. Public Service Electric and Gas Company, United
States District Court for the Eastern District of Pennsylvania Civil
Action No. 96-CU7705. Atlantic City Electric Company v. Public Service
Electric and Gas Company, New Jersey Superior Court, Law Division,
Atlantic County, Docket No. L-773-96.

(16) Page 62. Proceeding before the BPU related to the LEAC rate increase to
recover DSM costs, Docket number not yet assigned.

Item 4. Submission of Matters to a Vote of Security Holders

Enterprise and PSE&G, inapplicable.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Enterprise's Common Stock is listed on the New York Stock Exchange, Inc.
and the Philadelphia Stock Exchange, Inc. All of PSE&G's common stock is owned
by Enterprise, its corporate parent. As of December 31, 1996, there were 167,205
holders of record of Enterprise Common Stock.

The following table indicates the high and low sale prices for Enterprise's
Common Stock, as reported in The Wall Street Journal as Composite Transactions
and dividends paid for the periods indicated:

Dividend
High Low Per Share
-------- -------- ---------
Common Stock:
1996
First Quarter.......... $32 1/8 $25 1/4 $.54
Second Quarter......... 27 7/8 25 1/8 .54
Third Quarter.......... 27 7/8 25 5/8 .54
Fourth Quarter......... 29 26 3/8 .54

Common Stock:
1995
First Quarter.......... $29 7/8 $26 $.54
Second Quarter......... 30 1/4 26 3/4 .54
Third Quarter.......... 29 3/4 26 3/4 .54
Fourth Quarter......... 30 5/8 28 3/4 .54

Since 1986, PSE&G has made regular cash payments to Enterprise in the form
of dividends on outstanding shares of PSE&G's Common Stock. PSE&G has paid
quarterly dividends on its common stock in each year commencing in 1948, the
year of the distribution of PSE&G's common stock by Public Service Corporation
of New Jersey, the former parent of PSE&G. Since 1992, EDHI has made regular
cash payments to Enterprise in the form of dividends on outstanding shares of
EDHI's common stock. Enterprise has paid quarterly dividends in each year
commencing with the corporate restructuring of PSE&G when Enterprise became the
owner of all the outstanding common stock of PSE&G. While the Board of Directors
of Enterprise intends to continue the practice of paying dividends quarterly,
amounts and dates of such dividends as may be declared will necessarily be
dependent upon Enterprise's future earnings, financial requirements and other
factors.

Item 6. Selected Financial Data

Enterprise

The information presented below should be read in conjunction with
Enterprise Consolidated Financial Statements and Notes thereto.

Years Ended December 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- --------------- ---------------
(Thousands of Dollars, where applicable)

Total Operating Revenues.................... $6,041,249 $5,893,662 $5,695,323 $5,427,524 $5,106,279
Income from Continuing Operations........... 587,358 627,287 666,521 549,178 475,150
Cumulative Effect of Change in Accounting
for
Income Taxes............................. -- -- -- 5,414 --
Income from Discontinued Operations (A)..... 24,238 35,036 12,512 46,341 28,967
Net Income.................................. $611,596 $662,323 $679,033 $600,933 $504,117
Earnings per Average Share:
From Continuing Operations............... $2.42 $2.57 $2.73 $2.29 $2.05
From Cumulative Effect of Change in
Accounting for Income Taxes............ -- -- -- .02 --
From Discontinued Operations............. .10 .14 .05 .19 .12
Total Earnings per Average Share....... $2.52 $2.71 $2.78 $2.50 $2.17
Dividends Paid per Share.................... $2.16 $2.16 $2.16 $2.16 $2.16
As of December 31:
Total Assets............................. $16,915,331 $16,816,491 $16,312,734 $15,995,433 $14,543,696
Long-Term Liabilities:
Long-Term Debt......................... $4,580,231 $5,189,791 $5,110,022 $5,100,228 $4,962,884
Other Long-Term Liabilities............ $184,769 $199,832 $215,603 $220,159 $146,785
Preferred Stock With Mandatory Redemption... $150,000 $150,000 $150,000 $150,000 $75,000
Monthly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated
Debentures............................. $ 210,000 $ 210,000 $ 150,000 -- --
Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated
Debentures............................. $208,000 -- -- -- --
Ratio of Earnings to Fixed Charges plus
Preferred Securities Dividend
Requirements (B)(C)....................... 2.68 2.78 2.84 2.57 2.33

(A) See Note 2--Discontinued Operations of Notes.

(B) Fixed charges include the preferred securities dividend requirements of
PSE&G.

(C) Excludes income and expenses from discontinued operations.

PSE&G

The information presented below should be read in conjunction with PSE&G
Consolidated Financial Statements and Notes thereto.

Years Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- -------------- ------------- --------------
(Thousands of Dollars, where applicable)

Total Operating Revenues............................ $5,825,356 $5,707,245 $5,518,241 $5,290,455 $4,994,011
Net Income.......................................... $535,071 $616,964 $659,406 $614,868 $475,936
As of December 31:
Total Assets..................................... $14,799,354 $14,586,965 $14,259,398 $13,984,298 $12,396,593
Long-Term Liabilities:
Long-Term Debt................................. $4,107,331 $4,586,268 $4,486,787 $4,364,437 $3,978,138
Other Long-Term Liabilities.................... $184,769 $199,832 $215,603 $220,159 $146,785
Preferred Stock With Mandatory Redemption........... $150,000 $150,000 $150,000 $150,000 $75,000
Monthly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures............... $210,000 $210,000 $150,000 -- --
Quarterly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures............... $208,000 -- -- -- --
Ratio of Earnings to Fixed Charges.................. 2.83 3.25 3.35 3.30 2.70
Ratio of Earnings to Fixed Charges plus Preferred
Securities Dividend Requirements................. 2.62 2.77 2.92 2.89 2.43

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Enterprise

This discussion refers to the Consolidated Financial Statements and related
Notes (Notes) of Public Service Enterprise Group Incorporated (Enterprise) and
should be read in conjunction with such statements and notes.

Corporate Structure

Enterprise has two direct wholly owned subsidiaries, Public Service
Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings
Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating
public utility providing electric and gas service in certain areas in the State
of New Jersey.

EDHI is the parent of Enterprise's non-utility businesses: Community Energy
Alternatives Incorporated (CEA), an investor in, and developer and operator of,
cogeneration and independent power production (IPP) facilities and exempt
wholesale generators (EWGs); Public Service Resources Corporation (PSRC), which
has made primarily passive investments; Energis Resources Incorporated (ERI),
formed in 1996 and consolidating two existing energy services subsidiaries of
PSRC, which provides total energy services to industrial and commercial
customers both within and outside of PSE&G's traditional service territory (see
Competitive Environment) and Enterprise Group Development Corporation (EGDC), a
nonresidential real estate development and investment business. EDHI also has
two finance subsidiaries: PSEG Capital Corporation (Capital), which provides
privately placed debt financing to EDHI subsidiaries other than ERI on the basis
of a minimum net worth maintenance agreement with Enterprise and Enterprise
Capital Funding Corporation (Funding), which provides privately placed debt
financing to EDHI subsidiaries other than EDGC and ERI guaranteed by EDHI, but
without direct support from Enterprise. EDHI has been conducting a controlled
exit from the real estate business since 1993. In July 1996, EDHI sold Energy
Development Corporation (EDC), an oil and gas subsidiary.

As of December 31, 1996 and 1995, PSE&G comprised 88% of Enterprise assets.
For each of the years 1996, 1995 and 1994, PSE&G revenues were approximately 97%
of Enterprise's revenues and PSE&G's earnings available to Enterprise for such
years were 87%, 88% and 91%, respectively, of Enterprise's net income.

Overview of 1996

In January 1997, the New Jersey Board of Public Utilities (BPU) unveiled
its draft Phase II report of the New Jersey Energy Master Plan (draft Phase II
report) for deregulation of the electric utility industry. The draft Phase II
report requires PSE&G and other New Jersey electric utilities to develop rate
and service plans to give customers a choice of suppliers. Beginning in October
1998, five percent of retail electric customer load of all classes will be given
the ability to directly choose their electric power suppliers. All customers
would be phased-in by April 2001 (see Competitive Environment).

Operation of the Salem Nuclear Generating Station (Salem) Units continued
to present challenges to PSE&G. Both Salem Units 1 and 2 were shut down in
mid-1995 to address equipment and human performance issues and remained out of
service throughout 1996. Salem Unit 2 is expected to return to service in the
second quarter of 1997 and Salem Unit 1 in the Fall of 1997 (see Nuclear
Operations). The 1996 operating results reflect a one-time reduction of net
income of $59 million or 25 cents per share stemming from the BPU's December 31,
1996 Order (December 31st Order) resolving outstanding Salem and other
regulatory issues (see Note 3--Rate Matters of Notes). Despite these Salem
issues, Enterprise was able to achieve the following results:

- Formed ERI as a subsidiary of EDHI to better position Enterprise to
benefit from opportunities arising from deregulation

- Experienced a sharp increase in PSRC's income

- Reduced staff levels by 4.5% primarily through attrition

- Sold EDC, a non-regulated oil and gas exploration and development
business for a $13 million gain

- Initiated a common stock repurchase program of 5% of Enterprise's
outstanding Common Stock with a portion of the EDC sale proceeds

- Implemented cost containment initiatives to reduce annual operating
and maintenance expenses

- Initiated a refurbishment of five of PSE&G's older, less efficient
fossil generating plants which were scheduled to be closed but will
instead be used to serve the competitive capacity marketplace

Results of Operations

Earnings per share of Enterprise Common Stock were $2.52 in 1996, $2.71 in
1995 and $2.78 in 1994.

In 1996, Enterprise earnings decreased 19 cents per share or 7% compared to
1995 primarily due to the refunds required by the BPU's December 31st Order (see
Note 3--Rate Matters of Notes). Under this Order, PSE&G has provided electric
customers with bill credits totaling $84 million and will forego recovery of
another $12 million in energy costs that have been deferred. The December 31st
Order resulted in a 1996 earnings loss of $59 million, or 25 cents per share.
Other factors that decreased earnings were: increased operation and maintenance
expenses related to the outages at Salem and the Hope Creek Nuclear Generating
Station (Hope Creek) and increased depreciation expense due to more plant in
service. The earnings per share decrease was partially offset by higher gas
sales in early 1996 due to favorable weather conditions, the gain on the
repurchase of certain of PSE&G's outstanding cumulative preferred stock at a
discount to par, increased investment income from PSRC and a one-time gain on
the sale of EDC (see Note 2--Discontinued Operations of Notes).

In 1995, Enterprise earnings decreased 7 cents per share or 3% compared to
1994 primarily due to increased operating expenses and lower gas sales from
PSE&G. These decreases in earnings were partially offset by improved electric
sales, EDC revenues resulting from the settlement of litigation related to a
take or pay sales contract and from gains realized on sales of properties by
EDC.

PSE&G--Revenues

Electric

Increase or (Decrease)
----------------------
1996 1995
vs. vs.
1995 1994
---------------------
(Millions of Dollars)
---------------------
Kilowatt-hour sales................... $ (26) $ 38
Salem Refund.......................... (84) --
Recovery of energy costs.............. 30 189
New Jersey Gross Receipts and
Franchise Tax (NJGRT)................. (7) 12
Other operating revenues.............. 11 42
======== =======
Total Electric Revenues.......... $ (76) $281
======== =======

Revenues decreased $76 million, or 1.9% in 1996 and 1995 revenues increased
$281 million, or 7.5%. In 1996, electric revenues decreased primarily due to the
refunds required by the December 31st Order, lower industrial firm revenues due
to a new cogeneration operation installed at a customer's facility, outages at
some larger industrial customers and cooler summer weather. These decreases were
partially offset by increased residential and commercial sales due to economic
growth. In 1995, electric revenues increased due to higher residential and
commercial sales resulting from a recovering New Jersey economy, hot summer
weather and a modest increase in customer base. Other electric revenues
increased due to higher miscellaneous revenues from increased capacity sales to
unaffiliated utilities and to wholesale customers.

Gas

Increase or (Decrease)
----------------------
1996 1995
vs. vs.
1995 1994
---------------------
(Millions of Dollars)
---------------------
Therm sales .......................... $36 $(35)
Recovery of fuel costs................ 164 (78)
NJGRT................................. (8) 19
Other operating revenues.............. 3 2
========= =======
Total Gas Revenues............... $195 $(92)
========= =======

Revenues increased $195 million, or 11.5% in 1996 and 1995 revenues
decreased $92 million, or 5.2%. In 1996, gas revenues increased primarily due to
a higher recovery of fuel costs and favorable weather conditions in early 1996.
In 1995, gas revenues decreased due to mild winter weather and lower recovery of
fuel costs. These decreases were partially offset by increased revenues
resulting from off-system sales and higher gas service contract revenues.

PSE&G--Expenses

Fuel Expenses

Variances in fuel expenses do not directly affect earnings because of the
adjustment clause mechanism. In accordance with the December 31st Order, PSE&G
will forego recovery of $12 million in deferred energy costs, $5 million of
which was recorded in 1995 (see Note 1--Organization and Summary of Significant
Accounting Policies and Note 3--Rate Matters of Notes).

Other Operation and Maintenance Expenses

Other operation and maintenance expenses increased $38 million or 3% in
1996 and decreased $6 million or .5% in 1995. The 1996 increase was due to
higher costs related to outage expenses for Salem Units 1 and 2 and higher
refueling outage costs at Hope Creek. These expenses were partially offset by
decreased maintenance expenses at PSE&G's fossil generating stations and
decreased transmission and distribution expenses. The 1995 decrease was due to
decreased expenses in PSE&G's steam production area and at electric and gas
distribution facilities. These savings were partially offset by outage expenses
at Salem Units 1 and 2.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $13 million or 2% in 1996
and $40 million or 7% in 1995. The 1996 increase was due to the completion of
the repowering of the Bergen Generating Station in September 1995. The 1995
increase was due to increases in plant in service.

Federal Income Taxes

Federal income taxes decreased $56 million or 17% in 1996 and increased $27
million or 9% in 1995. The 1996 taxes were lower due to a decrease in pre-tax
operating income while the 1995 taxes were higher due to the receipt of a
nontaxable insurance benefit in 1994 and higher 1995 pre-tax operating income.

Allowance for Funds Used During Construction

Allowance for Funds Used During Construction (AFDC) decreased $19 million
or 54% in 1996 and $2 million or 5% in 1995 primarily due to a lower AFDC rate
in 1996 and the completion of the repowering of the Bergen Generating Station in
September 1995.

Net Gain (Loss) on Preferred Stock Redemptions

The $18.2 million net gain on the repurchase of certain of PSE&G's
outstanding Cumulative Preferred Stock at discounts to par resulted from PSE&G's
June 1996 tender offer (see External Financings--PSE&G).

EDHI--Net Income

Increase or (Decrease)
--------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
--------------------------- --------------------------------
Per Per
Amount Share Amount Share
------------ ------------- ------------- ----------------
(Millions of Dollars, except Per Share Data)

PSRC................................ $22 $.09 $ 1 $ --
CEA................................. (2) (.01) (4) (.02)
ERI................................. (6) (.02) (1) --
EGDC................................ (1) -- 1 --
------------ ------------- ------------- ----------------
Continuing Operations............... 13 .06 (3) (.02)
Discontinued Operations - EDC
Income from Operations............ (24) (.11) 23 .10
Gain on Sale...................... ------------ ------------ ------------ ----------------
Total....................... $ 2 $.01 $ 20 $ .08
============ ============= ============= ================

Continuing Operations

EDHI's income from continuing operations was $57 million in 1996, a $13
million increase over 1995 and $44 million in 1995, a $3 million decrease from
1994. The 1996 increase was due to PSRC's increased income from partnership
investments. ERI's income decreased due to increased administrative and general
expenditures (startup costs) and lower margins related to retail gas marketing.
The 1995 decrease was due primarily to CEA's higher interest and development
expenses.

Discontinued Operations

Income related to EDC operations was $11 million in 1996, a $24 million
decrease from 1995 and $35 million in 1995, a $23 million increase over 1994.
The 1996 decrease was due to the inclusion of only seven months of earnings for
1996 and a $23 million after-tax gain realized in 1995 related to the settlement
of a take-or-pay sales contract. The 1995 increase was due mainly to the
aforementioned gain related to the settlement of a take-or-pay sales contract.

Liquidity and Capital Resources

Enterprise

Cash generated from operations will provide the major source of funds for
the growth of the business. Cash and cash equivalents totaled $279 million at
the end of 1996 compared with $62 million at the end of 1995.

During 1996, Enterprise repurchased 11.2 million shares of its Common Stock
at an aggregate cost of $307 million. The Common Stock repurchase program
concluded on January 17, 1997. A total of 12.7 million shares were repurchased
under the program at a cost of $350 million.

In 1996, cash provided by operating activities totaled $1.434 billion, down
from $1.535 billion in 1995. Major contributors were net income of $612 million
and noncash provisions of $607 million for depreciation and amortization. Cash
used in investing activities totaled $9 million, down from $935 million in 1995;
primarily as a result of the sale of EDC. Net proceeds from the EDC sale were
$704 million. Cash used in financing activities was $1.208 billion in 1996.
Dividend payments on Common Stock were $2.16 per share and totaled $523 million,
a payout of 86% of net income. Long-term debt decreased in 1996 by $610 million
to $4.580 billion due primarily to scheduled debt maturities. Common equity
decreased by $225 million to $5.213 billion due primarily to the repurchase of
common stock. The return on average common equity decreased to 11.3% in 1996
compared to 12.3% in 1995 due primarily to a decrease in net income.

In 1995, cash provided by operating activities totaled $1.535 billion, up
from $1.244 billion in 1994. Major contributors were net income of $662 million
and noncash provisions of $597 million for depreciation and amortization. Cash
used in investing activities totaled $935 million in 1995, down from $1.010
billion in 1994 primarily as a result of a decrease in additions to utility
plant. Cash used in financing activities was $603 billion in 1995. Dividend
payments on Common Stock were $2.16 per share and totaled $529 million, a payout
of 80% of net income. Long-term debt increased in 1995 by $9 million to $5.190
billion. Common equity increased by $132 million to $5.438 billion. The return
on average common equity decreased to 12.3% in 1995 compared to 13.0% in 1994
due primarily to a decrease in net income.

As of December 31, 1996, Enterprise's capital structure consisted of 49.8%
common equity, 43.7% long-term debt and 6.5% preferred stock and securities. The
capital structure as of December 31, 1995 consisted of 48.1% common equity,
45.8% long-term debt and 6.1% preferred stock and securities.

PSE&G

PSE&G had utility plant additions of $603 million, $686 million and $887
million, for 1996, 1995 and 1994, respectively, including AFDC of $17 million,
$36 million and $38 million, respectively. Construction expenditures were
related to improvements in PSE&G's existing power plants, transmission and
distribution system, gas system and common facilities. PSE&G also expended $34
million, $30 million and $34 million for the cost of plant removal (net of
salvage) in 1996, 1995 and 1994, respectively. Construction expenditures from
1997 through 2001 are expected to aggregate $2.6 billion, including AFDC.
Forecasted construction expenditures are related to improvements in PSE&G's
transmission and distribution system, existing power plants (including
acquisition of nuclear fuel), gas system and common facilities.
(See Construction and Capital Requirements Forecast below.)

PSE&G expects that it will be able to internally generate all of its
construction and capital requirements over the next five years and reduce its
debt outstanding by approximately $1 billion, assuming adequate and timely
recovery of costs, as to which no assurances can be given (see Note 3--Rate
Matters and Note 13--Commitments and Contingent Liabilities of Notes).

EDHI

During the next five years, a majority of EDHI's capital requirements are
expected to be provided from additional debt financing and operational cash
flows. (See Construction and Capital Requirements Forecast below.) CEA and ERI
are expected to be the primary vehicles for EDHI's business growth. A
significant portion of CEA's growth is expected to occur in the international
arena due to the current and anticipated growth in electric capacity required in
certain regions of the world. ERI is expected to expand upon the current energy
related services being provided to industrial and commercial customers.

PSRC will continue to limit new investments to those related to energy
businesses, while EGDC will continue its exit from the real estate business in a
prudent manner. Over the next several years, EDHI and its subsidiaries will also
be required to refinance a portion of their maturing debt in order to meet their
capital requirements. Any inability to extend or replace maturing debt and or
existing agreements at current levels and interest rates may affect future
earnings and result in an increase in EDHI's cost of capital.

PSRC is a limited partner in various limited partnerships and is committed
to make investments from time to time, upon the request of the respective
general partners. At December 31, 1996, $30 million remained as PSRC's unfunded
commitment subject to call.

EDHI, CEA and PSRC are subject to restrictive business and financial
covenants contained in existing debt agreements. EDHI is required to maintain a
debt to equity ratio of no more than 2.0:1 and a twelve-months earnings before
interest and taxes to interest (EBIT) coverage ratio of at least 1.50:1. As of
December 31, 1996 and 1995, EDHI had consolidated debt to equity ratios of
1.05:1 and 1.15:1 respectively, and for the years ended December 31, 1996, 1995
and 1994, EBIT coverage ratios, as defined to exclude the effects of EGDC and
the gain on the sale of EDC, of 2.45:1, 2.47:1 and 1.94:1, respectively.
Compliance with applicable financial covenants will depend upon future financial
position and levels of earnings, as to which no assurance can be given. (See
Note 7--Schedule of Consolidated Debt of Notes.)

Construction and Capital Requirements Forecast

1997 1998 1999 2000 2001 TOTAL
--------- ---------- --------- --------- --------- ----------
(Millions of Dollars)

Construction and Investment Requirements:
PSE&G........................................... $589 $547 $506 $505 $481 $2,628
EDHI............................................ 173 269 312 320 291 1,365
--------- ---------- --------- --------- --------- ----------
Total Construction and Investment Requirements.. 762 816 818 825 772 3,993
--------- ---------- --------- --------- --------- ----------
Mandatory Retirement of Securities:
PSE&G........................................... 400 118 100 400 100 1,118
EDHI............................................ 125 195 200 78 -- 598
--------- ---------- --------- --------- --------- ----------
Total Retirement of Securities 525 313 300 478 100 1,716
--------- ---------- --------- --------- --------- ----------

Total Capital Requirements................. $1,287 $1,129 $1,118 $1,303 $872 $5,709
========= ========== ========= ========= ========= ==========

External Financings--PSE&G

PSE&G has BPU authority to issue approximately $4.734 billion aggregate
amount of Bonds/MTNs/Preferred Securities through 1997 for refunding purposes.
Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds
(Bonds) against previous additions and improvements and/or retired Bonds
provided that its ratio of earnings to fixed charges is at least 2:1. As of
December 31, 1996, the Mortgage would permit up to $3.047 billion aggregate
principal amount of new Bonds to be issued against previous additions and
improvements. At December 31, 1996, the coverage ratio under PSE&G's Mortgage
was 3.30:1.

In January 1996, PSE&G issued $350 million of its Bonds. The net proceeds
from the sale were deposited in an escrow account and used to refund PSE&G's
8.75% Series EE Bonds due 2021 and 8.75% Series HH Bonds due 2022 at their
respective first optional redemption dates.

In June 1996, PSE&G Capital Trust I (Trust I), a special purpose statutory
business trust controlled by PSE&G, issued $208 million of 8.625% Quarterly
Income Preferred Securities (Quarterly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures). PSE&G used the proceeds to redeem all
500,000 shares of each of its 7.52% and 7.40% Cumulative Preferred Stock $100
par value at $101 per share on June 28, 1996. In addition, PSE&G purchased,
pursuant to a tender offer, an aggregate $111.6 million of its 4.08%, 4.18%,
4.30%, 5.05%, 5.28%, 6.80% and 6.92% Cumulative Preferred Stock $100 par value.

In February 1997, PSE&G Capital Trust II (Trust II), a special purpose
statutory business trust controlled by PSE&G, issued $95 million of 8.125%
Quarterly Income Preferred Securities (Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures). PSE&G used the proceeds to fund
the redemption of all 188,684 shares of its 6.80% Cumulative Preferred Stock
$100 par value at $102 per share on January 31, 1997 and will redeem all 750,000
shares of its 7.44% Cumulative Preferred Stock $100 par value at $103.72 per
share in June 1997.

The BPU has authorized PSE&G to issue and have outstanding at any one time
not more than $1.3 billion of short-term obligations, consisting of commercial
paper and other unsecured borrowings from banks and other lenders through
January 2, 1999. At December 31, 1996, PSE&G had $525 million of short-term debt
outstanding.

To provide liquidity for its commercial paper program, PSE&G has a $500
million one-year revolving credit agreement expiring in August 1997 and a $500
million five-year revolving credit agreement expiring in August 2000 with a
group of commercial banks, which provides for borrowing up to one year. On
December 31, 1996, there were no borrowings outstanding under these credit
agreements. PSE&G expects to be able to renew the credit agreement expiring in
1997.

Public Service Conservation Resources Corporation (PSCRC) has a $30 million
revolving credit facility supported by a PSE&G subscription agreement in an
aggregate amount of $30 million which terminates on March 7, 1997. As of
December 31, 1996, PSCRC had $30 million outstanding under this facility.

PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom Atomic Power Station (Peach Bottom)
nuclear fuel, supported by a $125 million revolving credit facility with a group
of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of
Fuelco's respective obligations under this program. As of December 31, 1996,
Fuelco had commercial paper of $83 million outstanding under such program.

External Financings--EDHI

Through July 31, 1996, Funding had a commercial paper program, supported by
a commercial bank letter of credit and credit facility, in the amount of $225
million. Additionally, Funding had a $225 million revolving credit facility.
Both facilities were scheduled to expire in March 1998. On July 31, 1996,
Funding amended and restated its commercial paper program and revolving credit
facility in conjunction with the sale of EDC, reducing the total amount from
$450 million to $300 million and extending the maturity from March 1998 to July
1999. The $225 million commercial paper program was eliminated and the $225
million revolving credit facility was increased to $300 million. As of December
31, 1996, Funding had no borrowings outstanding under the amended and restated
facility.

Capital's Medium-Term Note (MTN) program is expected to provide an
aggregate principal amount of up to $650 million and its total debt outstanding
at any time, including MTNs, is not expected to exceed such amount. In 1996,
Capital repaid $20 million of its MTNs. At December 31, 1996, Capital had total
debt outstanding of $415 million, including $335 million of MTNs.

Nuclear Operations

PSE&G's Salem Units 1 and 2 were taken out of service in the second quarter
of 1995. Salem Unit 2 is expected to return to service in the second quarter of
1997. Salem Unit 1 is expected to return to service in the Fall of 1997
following installation of new steam generators. Restart of each Salem Unit is
subject to the approval of the NRC. The cost of the steam generator replacement,
including installation, will be approximately $150 to $170 million (PSE&G's
share will be $64 to $72 million). In addition, the cost of disposal of the four
old steam generators could be as much as $20 million (PSE&G's share would be $9
million). The inability to successfully return these units to continuous, safe
operation could have a material adverse effect on the financial position,
results of operations and net cash flows of Enterprise and PSE&G (see Note
3--Rate Matters of Notes).

PSE&G's share of total operating and maintenance expenses for both Salem
units for 1996 was $136 million and capital costs were $119.2 million, which
includes $59.7 million for steam generator replacement. The outage of a Salem
unit causes PSE&G to incur replacement power costs of approximately $4 to $6
million per month. Such amounts vary, however, depending on the availability of
other generation, the cost of purchased energy and other factors, including
modifications to maintenance schedules of other units.

On January 29, 1997, the Nuclear Regulatory Commission (NRC) Staff placed
Salem Units 1 and 2 on the NRC Watch List and designated the Salem Units as
Category 2 facilities (a plant that is authorized to operate, but one that the
NRC Staff will monitor closely). The NRC Staff noted that this action was not
due to any performance problems or decline during this evaluation period but
that Salem should have been previously designated as a Category 2 plant and
would not be ready to leave that status until satisfactory integrated station
performance at power could be observed.

Competitive Environment

Many forces are reshaping how the utility industry meets the needs and
expectations of its customers and shareholders. Profound changes in the way the
industry is regulated will affect how Enterprise conducts business and its
financial prospects in the future. Competitive changes in the utility industry
continued to occur in 1996 and early 1997. With the issuance of Federal Energy
Regulatory Commission (FERC) Order No. 888 in July 1996 and the draft Phase II
report issued by the BPU in January 1997, Enterprise is now in a better position
to identify and develop strategies for addressing the issues that the changing
regulatory structure presents.

Draft Phase II Report

On January 16, 1997, the BPU addressed wholesale and retail electric
competition in New Jersey and proposed the restructuring of the electric power
industry. In 1997, New Jersey regulators plan to establish the rules that will
eventually enable consumers in all market sectors to choose their providers of
energy and energy service in the future. With the emergence of this competitive
marketplace, Enterprise has and will continue to take significant steps to meet
the challenges posed by this changing environment. A summary of the draft Phase
II report follows:

Beginning in October 1998, 5% of retail electric customer load of all
classes (industrial, commercial and residential) will be given the ability
to directly choose their electric power supplier. All customer load would
be phased-in, with the percentage increasing to 20% in April 1999, 35% in
October 1999, 50% in April 2000, 75% in October 2000 and 100% in April
2001.

Beginning October 1998, the rates for bundled electricity services,
consisting of power generation, transmission, distribution and auxiliary
customer services, such as metering and billing, would be unbundled. Each
electric utility, including PSE&G, would continue to be responsible for
providing distribution service to all customers, with price and service
quality for distribution service regulated by the BPU. Other customer
services would also continue to be offered by each electric utility for a
monthly fee, including metering, billing and account administration, which
would also be regulated by the BPU.

Transmission service would be provided by an Independent System Operator
(ISO) which would be responsible for maintaining the reliability of the
regional power grid and would be regulated by FERC. Utilities would
continue to pass through the cost of transmission to customers in regulated
rates. Metering and billing would also be reviewed in order to make
recommendations for the introduction of competition into the customer
services area. A distribution utility would be permitted to offer
customer-side services, such as equipment repair and service contracts in a
competitive marketplace.

The draft Phase II report states that a fully competitive marketplace must
exist before the BPU will act to end economic regulation of power supply.
This will require, at a minimum, utility generating assets and functions to
be functionally separated and operate at arms length from the transmission,
distribution and customer service functions of the electric utilities. The
BPU would reserve final judgment on the issue of requiring divestiture of
utility generating assets until detailed analyses of the potential for
market power abuses by utilities have been performed. In addition, the BPU
indicated its belief that it is necessary to have a fully independent and
operating ISO prior to the implementation of customer choice. The BPU
proposes that retail competition in New Jersey be introduced approximately
12 to 18 months after the implementation of full wholesale competition as
provided by FERC Order No. 888.

Each electric utility would be required to file, no later than July 15,
1997, complete restructuring plans, stranded cost filings and unbundled
rate filings. Review of the filings would be completed by October 1998.

Consumer protections proposed include: maintaining the electric utility as
a universal service or "basic generation service" provider; continued
funding of social programs now provided by electric utilities; registration
of all third party power suppliers with the BPU; establishment of standards
of conduct for third party power suppliers; and continued funding for
energy efficiency programs.

Utilities would have an opportunity for a limited number of years to
recover through rates stranded costs associated with generating capacity
commitments made prior to the advent of competition. However, while the
draft Phase II report proposes that the quantification of eligible stranded
costs and a determination of stranded cost recovery should be undertaken on
a case-by-case basis, 100% recovery of all eligible stranded costs would
not be guaranteed. The opportunity for full recovery of such eligible costs
would be contingent upon and may be constrained by the utility meeting a
number of conditions, including achievement of the goal of delivering a
near term rate reduction to customers of 5 to 10%. The presumptive cutoff
point for electric generation stranded cost recovery for each utility would
be its last base rate case with costs incurred after such last base rate
case to be subject to a greater burden of proof for recovery, including
evidence of a market test to determine availability of cost-effective
alternatives. PSE&G's last rate case was finalized on December 31, 1992,
reflecting a test year ended of June 30, 1992.

The draft Phase II report states that utilities are obligated to take all
reasonably available measures to mitigate stranded costs caused by the
introduction of retail competition. A specific market charge would be a
separate component of a customer's electric bill, to provide a mechanism to
allow utilities the opportunity to recover stranded costs for a limited
number of years, ranging from four to eight. New Jersey is currently
studying the "securitization" of stranded costs as a means of financing
these costs at interest rates lower than the utility's cost of capital,
thereby helping to mitigate the rate impact of stranded cost recovery.
Recovery of securitization may occur over a longer period of time.

The draft Phase II report suggests the need for federal action in a number
of areas as an integral part of electric restructuring. Of particular
concern is the transport of nitrogen oxides (NOx) and other pollutants to
New Jersey from power plants located in the Midwest and Southeast. New
Jersey will develop a contingency action plan if federal action fails to
mitigate adverse environmental impacts caused by electric restructuring.

PSE&G is currently assessing the draft Phase II report's proposed findings
and recommendations and in accordance with the proceeding requirements and will
file formal written comments on February 28, 1997. On February 4, 5, and 11,
1997, PSE&G participated in a Phase II public hearings and will work vigorously
toward the goal of opening the New Jersey marketplace to competition. PSE&G also
indicated its intent to develop and submit a comprehensive restructuring plan
that meets the BPU's and PSE&G's shared objectives by the July 15, 1997
deadline. Since the Phase II proceeding is still in the proposal phase, PSE&G
cannot predict the outcome of the final Phase II report.

FERC Order No. 888 (Order No. 888)

Order No. 888 became effective on July 9, 1996 and requires all public
utilities owning, controlling or operating transmission lines to file
nondiscriminatory open access tariffs that offer others the same transmission
service they provide to themselves. By March 1, 1997, intra-pool transactions
for power pools must also be under a nondiscriminatory, pool-wide open access
tariff. In July 1996, the member companies of Pennsylvania--New Jersey--Maryland
Interconnection (PJM), including PSE&G but excluding PECO Energy Company (PECO),
filed a proposal to reorganize PJM into an ISO to administer a pool-wide
open-access transmission tariff and to operate a centrally dispatched bid-based
energy market in response to Order No. 888. PECO filed a separate proposal with
FERC. On November 13, 1996, FERC announced that it was rejecting the
restructuring proposals of both PECO and the other PJM companies due to concerns
regarding the independence of the proposed ISO and directed PJM to submit a
single consensus pool restructuring proposal by December 31, 1996. On December
31, 1996, PJM submitted a pool-wide open-access transmission tariff and a
reformed pooling agreement. The filing consisted of a pro forma tariff and
revised pool agreement that contained some of the same differences with PECO as
the earlier filings. These differences were presented as side-by-side
comparisons in the single filing. FERC has not yet responded to the filing but
is expected to do so by March 1, 1997.

As a result of open access mandated by Order No. 888, there is likely to be
increased competition from older, dirtier coal-fired plants in the Midwest that
are subject to less restrictive pollution control requirements than utilities in
Northeastern states and consequently, produce lower cost energy. These
facilities, by increasing their power production in order to sell into the
Northeast market, will, in turn, increase the release of pollutants that
eventually make their way to New Jersey and other northeastern states due to the
prevailing westerly winds. PSE&G, which has to comply with strict New Jersey
environmental laws, will be at a competitive disadvantage if Order No. 888 is
not modified to recognize this issue. Numerous parties, including PSE&G, have
filed requests seeking rehearing and clarification of various aspects of Order
No. 888. These filings are currently pending before the FERC. After exhausting
administrative remedies, judicial appeals of Order No. 888 are also possible. It
is possible, therefore, that Order No. 888 will be substantially modified.

NJGRT

A joint task force of the BPU and the New Jersey Treasury Department has
proposed replacing the current 13% NJGRT collected by utilities from their
customers with a combination of a corporate business tax, state sales and use
tax and a transitional assessment which would be phased out over an expected
seven year time frame. After the phase-out is completed, the proposal would
improve the competitive position of PSE&G vis-a-vis non-utility energy providers
in New Jersey who do not collect such tax. If this tax reform is not adopted,
PSE&G would remain at a significant competitive disadvantage since PSE&G's rates
would be up to 13% higher than non-utility energy providers. PSE&G cannot
predict when or if this proposal will be adopted.

Gas Unbundling

On August 23, 1996, PSE&G filed its Gas Unbundling Status Report. The
filing also contained PSE&G's proposal for a residential gas unbundling pilot
program to be known as SelectGas. If approved, this pilot program will allow
certain residential natural gas customers to participate in a competitive
marketplace. The SelectGas pilot program would involve four municipalities
representing approximately 65,000 residential customers. The review of the pilot
program, including formal discovery, has been initiated. PSE&G cannot predict
when or if this proposal will be adopted.

Off-Tariff Rate Agreement (OTRA)

In 1995, the BPU initiated a generic proceeding that would give PSE&G the
ability to offer "off-tariff" negotiated rates to customers. Although these
OTRA's are offered at PSE&G's sole discretion, they are subject to BPU approval
of minimum price, confidentiality of information, contract duration, regulatory
filing requirements and other reporting requirements. These negotiated OTRA's
form part of PSE&G's overall strategy to retain customers in its service
territory. To date, three OTRA's have been filed with and approved by the BPU
and PSE&G is currently in negotiations with several other customers. PSE&G
cannot predict how many customers will leave or stay in this increasingly
competitive environment.

Competitive Transition Charge (CTC)

On September 19, 1996, PSE&G filed a petition with the BPU to establish an
interim CTC. The CTC is designed to recover stranded costs which may result from
a customer leaving PSE&G's system as a full requirements customer. If approved
by the BPU as filed, this charge would apply to customers who, after September
19, 1996, commit to an alternate source of electric power while remaining
physically located in PSE&G's electric franchise area. Further, this interim
charge would be limited to customers with present billing demands in excess of
500KW. The proposed charge would be interim pending BPU resolution of the draft
Phase II report which addresses the stranded cost issue on a generic basis.
PSE&G cannot predict what action the BPU may take with respect to the CTC
petition.

Stranded Costs

Recoverability of stranded costs is largely dependent on the transition
rules established by regulators, including FERC and the BPU. Stranded costs that
could result as the industry moves to a more competitive environment include
investments in generating facilities, transmission assets, purchase power
agreements where the price being paid under such an agreement exceeds the market
price for electricity and regulatory assets for which recovery is based solely
on continued cost based regulation. Since the Energy Master Plan proceeding is
still in the proposal phase, and recognizing that the issue of securitization
and the extent of its application have not been determined, as well as the
potential need for legislative action, management cannot predict the level of
PSE&G's stranded costs or the extent to which regulators will allow recovery of
such costs.

Bond Ratings

The changes in the utility industry are attracting increased attention of
bond rating agencies which regularly assess business and financial matters
including how utility companies are meeting competition and competitive
initiatives, especially as they affect potential stranded costs. Bond ratings
affect the cost of capital and the ability to obtain external financing. PSE&G
continually updates the rating agencies on all corporate matters. This minimizes
surprises and gives the rating agencies time to comprehend the information.
Given the uncertainty of the industry, attention and scrutiny of PSE&G's
competitive strategies by rating agencies will likely continue. This could
result in changes to PSE&G's bond ratings.

ERI

On December 31, 1996, Enterprise formed ERI, which it believes better
positions Enterprise to enter the rapidly deregulating energy market by
marketing products and services to industrial and commercial customers
throughout the Northeast and Mid-Atlantic States. ERI has consolidated the
operations of two former PSRC subsidiaries with proven track records: U.S.
Energy Partners, which sold natural gas, and Enterprise Strategic Energy
Solutions, which provided consulting, engineering and repair services. In
addition, the financing of energy-savings or demand-side management projects,
formerly offered by PSE&G's subsidiary, PSCRC, will now be supplied by ERI. ERI
is expected to draw on Enterprise's depth of experience and financial strength
by offering a variety of services: sales of natural gas and electricity; energy
consulting; engineering, equipment installation and repair; inspection and
diagnostic services for motors, generators and other energy conversion and use
equipment; and up-front financing. ERI's potential customers include small
businesses, department stores, schools, hospitals and manufacturers from Maine
to Maryland.

Accounting Issues

Currently, PSE&G accounts for the effects of regulation in accordance with
Statement of Financial Accounting Standards No. 71 "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). In accordance with the provisions of
SFAS 71, PSE&G defers certain expenses (regulatory assets) on the basis that
they will be recovered from customers through the ratemaking process. PSE&G
believes it continues to meet the criteria to account for certain utility
revenues and expenses in accordance with SFAS 71. However, if future events or
regulatory changes limit PSE&G's ability to establish prices to recover its
costs, PSE&G might conclude that it no longer meets the applicable criteria to
defer certain expenses in accordance with SFAS 71. If PSE&G were to discontinue
the application of SFAS 71, the accounting impact would be an extraordinary,
noncash charge to operations that could be material to the financial position,
results of operations or net cash flows of Enterprise and PSE&G.

PSE&G has certain regulatory assets resulting from the use of a level of
depreciation expense in the ratemaking process that is less than the amount that
is recorded under generally accepted accounting principles for non-regulated
companies. PSE&G cannot presently quantify what the financial statement impact
would be if depreciation expense were required to be determined absent
regulation, but the impact on the financial position, results of operations or
net cash flows of Enterprise and PSE&G could be material.

Statement of Position 96-1 "Environmental Remediation Liabilities" (SOP
96-1) issued by the American Institute of Certified Public Accountants is
effective for the fiscal years that begin after December 15, 1996. SOP 96-1
provides guidance where remediation is required because of the threat of
litigation, a claim, or an assessment. This Statement does not provide guidance
on accounting for pollution control costs as it applies to current operations,
costs of future site restoration or closure that are required upon the cessation
of operations or sale of facilities or for remediation obligations undertaken at
the sole discretion of management. The adoption of SOP 96-1 is not expected to
have a material impact on the financial position, results of operations or net
cash flows of Enterprise and PSE&G.

Rate Matters

See Note 3--Rate Matters of Notes.

Site Restorations and Other Environmental Costs

It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. PSE&G accrues environmental provisions
when it is probable that a liability has been incurred and the amount of the
liability is reasonably estimable. Management expects that the amounts provided
as of December 31, 1996 and 1995 will be paid out over the period of
investigation, negotiation, remediation and restoration for the applicable
sites, which may be 30 years or more. Provisions for estimated losses from
environmental remediation are, depending on the site, based primarily on
internal and third-party environmental studies, estimates as to the number and
participation level of any other Potentially Responsible Parties, the extent of
the contamination and the nature of required remedial and restoration actions.
The cost of environmental remediation could be material to Enterprise and
PSE&G's financial position, results of operations or net cash flows. (See Note
13--Commitments and Contingent Liabilities of Notes.)

Future Outlook

One of the most important lessons of 1996 was that deregulation is coming
sooner, not later. To meet the challenge of deregulation, Enterprise is focusing
on three business objectives: getting the rules right, investing for growth and
achieving operational excellence.

Enterprise is seeking to ensure that the new rules on industry
restructuring provide customer choice and lower cost without endangering public
safety or compromising New Jersey's stringent environmental standards.

Equally important are the investments that keep the business growing. To
this end, Enterprise will rely to a large extent on CEA. Because of the
substantial opportunities overseas, CEA focuses on international markets. CEA is
already established and competitive in several international markets. Another
way Enterprise will grow the business is by providing regional energy services
through ERI. ERI markets new and existing energy products and services to
commercial and industrial business customers throughout the Northeast and
Mid-Atlantic states. As the deregulation of the gas and electricity markets
increase, Enterprise expects ERI to play a significant role in its domestic
growth.

Enterprise is continuing to emphasize operational excellence as a key
business objective. Enterprise is looking at all operating areas for
opportunities to cut costs and increase efficiency. As part of its commitment to
operational excellence, Enterprise is implementing a business integration system
which is designed to increase operating efficiencies across all of its business
organizations.

Enterprise and PSE&G cannot predict the ultimate outcome of the
ongoing changes that are taking place in the utility industry or predict whether
such outcome will have a material impact on its financial condition, results of
operations or net cash flows. However, Enterprise and PSE&G believe that the end
result will involve a fundamental change in the way it conducts business. These
changes may impact financial operating trends and could result in earnings
volatility. PSE&G is actively seeking regulatory and operational changes that
will allow it to provide energy services in a safe and reliable manner at
competitive prices while achieving strong financial performance.

PSE&G

The information required by this item is incorporated herein by reference
to the following portions of Enterprise's Management's Discussion and Analysis
of Financial Condition and Results of Operations, insofar as they relate to
PSE&G and its subsidiaries: Corporate Structure; Overview of 1996; Results of
Operations; Liquidity and Capital Resources; Nuclear Operations; Competitive
Environment; Accounting Issues; Rate Matters; Site Restorations and Other
Environmental Costs and Future Outlook.

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 (the Act) provides a
new "safe harbor" for forward-looking statements to encourage such disclosures
without the threat of litigation providing those statements are identified as
forward-looking and are accompanied by meaningful, cautionary statements
identifying important factors that could cause the actual results to differ
materially from those projected in the statement. Forward-looking statements
have been made in this report. Such statements are based on management's beliefs
as well as assumptions made by and information currently available to
management. When used herein, the words "will", "anticipate", "estimate",
"expect", "objective" and similar expressions are intended to identify
forward-looking statements. In addition to any assumptions and other factors
referred to specifically in connection with such forward-looking statements,
factors that could cause actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following: deregulation and the unbundling of energy supplies and services; an
increasingly competitive energy marketplace; sales retention and growth
potential in a mature service territory and a need to contain costs; ability to
obtain adequate and timely rate relief, cost recovery, including the potential
impact of stranded costs, and other necessary regulatory approvals; federal and
state regulatory actions; costs of construction; operating restrictions,
increased cost and construction delays attributable to environmental
regulations; nuclear decommissioning and the availability of reprocessing and
storage facilities for spent nuclear fuel; licensing and regulatory approval
necessary for nuclear and other operating stations; and credit market concerns.
Enterprise and PSE&G undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Act should
not be construed as exhaustive or as any admission regarding the adequacy of
disclosures made by Enterprise and PSE&G prior to the effective date of the Act.

[THIS PAGE INTENTIONALLY LEFT BLANK]

Item 8. Financial Statements and Supplementary Data

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Data)

For The Years Ended December 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------

OPERATING REVENUES
Electric $ 3,944,362 $ 4,020,842 $ 3,739,713
Gas 1,880,994 1,686,403 1,778,528
Nonutility Activities 215,893 186,417 177,082
----------- ----------- -----------
Total Opearting Revenues 6,041,249 5,893,662 5,695,323
----------- ----------- -----------

OPERATING EXPENSES
Operation
Fuel for Electric Generation and
Interchanged Power 918,514 891,782 695,763
Gas Purchased 1,117,716 961,539 1,023,956
Other 1,053,520 1,007,735 1,015,806
Maintenance 318,280 312,610 308,080
Depreciation and Amortization 607,293 596,966 555,461
Taxes
Federal Income Taxes (note 11) 290,253 337,966 309,946
New Jersey Gross Receipts Taxes 598,016 612,961 583,167
Other 80,698 76,913 81,305
----------- ----------- -----------
Total Operating Expenses 4,984,290 4,798,472 4,573,484
----------- ----------- -----------

OPERATING INCOME 1,056,959 1,095,190 1,121,839
----------- ----------- -----------

OTHER INCOME (EXPENSES)
Allowance for Funds Used During Construction -
Equity -- 5,324 12,789
Miscellaneous - net (1,920) 8,041 6,430
----------- ----------- -----------
Total Other Income (Expenses) (1,920) 13,365 19,219
----------- ----------- -----------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES 1,055,039 1,108,555 1,141,058
----------- ----------- -----------

Interest Charges (note 7)
Long-Term Debt 386,289 402,213 425,422
Short-Term Debt 33,759 32,822 23,962
Other 33,063 29,172 12,805
----------- ----------- -----------
Total Interest Charges 453,111 464,207 462,189

Allowance for Funds Used During Construction -
Debt and Capitalized Interest (18,155) (32,839) (29,799)
----------- ----------- -----------
Net Interest Charges 434,956 431,368 432,390

Preferred Securities Dividend Requirements
(note 5) 27,741 15,664 1,680
Preferred Stock Dividend Requirements (note 5) 23,161 33,762 40,467
Net Gain (Loss) on Preferred Stock Redemptions
(note 5) 18,177 (474) --
----------- ----------- -----------

INCOME FROM CONTINUING OPERATIONS 587,358 627,287 666,521

Discontinued Operations - Net of Taxes (note 2) 10,746 35,036 12,512
Gain on Sale of Discontinued Operations - Net
of Taxes 13,492 -- --
----------- ----------- ------------

NET INCOME $ 611,596 $ 662,323 $ 679,033
=========== =========== ============

SHARES OF COMMON STOCK OUTSTANDING
End of Period 233,470,291 244,697,930 244,697,930
Average for Period 242,400,755 244,697,930 244,470,794

EARNINGS PER AVERAGE SHARE
Income From Continuing Operations $ 2.42 $ 2.57 $ 2.73
Income From Discontinued Operations 0.04 0.14 0.05
Gain on Sale of Discontinued Operations 0.06 -- --
----------- ----------- ------------

TOTAL EARNINGS PER AVERAGE SHARE $ 2.52 $ 2.71 $ 2.78
=========== =========== ============

DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 2.16 $ 2.16 $ 2.16
=========== =========== ============

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands of Dollars)

December 31, December 31,
1996 1995
------------ ------------

UTILITY PLANT - Original cost (note 16)
Electric ..................................................... $13,314,033 $13,095,103
Gas .......................................................... 2,555,901 2,442,572
Common ....................................................... 530,185 517,104
----------- -----------
Total .................................................... 16,400,119 16,054,779
Less: Accumulated depreciation and amortization .............. 5,889,098 5,440,414
----------- -----------
Net ...................................................... 10,511,021 10,614,365
Nuclear Fuel in Service, net of accumulated amortization -
1996, $259,384; 1995, $297,435.............................. 198,845 180,018
----------- -----------
Net Utility Plant in Service ............................. 10,709,866 10,794,383
Construction Work in Progress, including Nuclear Fuel in
Process - 1996, $70,455; 1995, $104,743.................... 445,321 369,082
Plant Held for Future Use .................................... 23,966 23,966
----------- -----------
Net Utility Plant ......................................... 11,179,153 11,187,431
----------- -----------
INVESTMENTS AND OTHER NONCURRENT ASSETS (notes 4, 8, 9 and 12)
Long-Term Investments, net of amortization - 1996, $12,679;
1995 $6,009, and net of valuation allowances - 1996,
$16,969; 1995, $ - 1,854,304 1,808,368
Real Estate Property and Equipment, net of accumulated
depreciation - 1996, $5,906; 1995, $6,121................... 64,753 88,627
Other Plant, net of accumulated depreciation and amortization
- 1996, $6,518; 1995, $6,677................................ 37,031 28,720
Nuclear Decommissioning and Other Special Funds (note 4)....... 382,348 313,178
Other Assets - net of valuation allowances - 1996, $826; 1995,
$ - 13,548 3,851
----------- -----------
Total Investments and Other Noncurrent Assets ............ 2,351,984 2,242,744
----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents (note 10).......................... 278,903 61,964
Accounts Receivable:
Customer Accounts Receivable ............................... 499,858 525,404
Other Accounts Receivable .................................. 241,483 201,775
Less: Allowance for Doubtful Accounts 42,283 38,003
Unbilled Revenues ............................................ 248,504 246,876
Fuel, at average cost ...................................... 313,019 253,360
Materials and Supplies, at average cost, net of inventory
valuation reserves - 1996, $16,100; 1995, $20,100......... 147,757 143,741
Deferred Income Taxes (note 11)............................... 23,210 27,571
Miscellaneous Current Assets ................................. 33,976 39,884
Net Assets of Discontinued Operations ........................ -- 365,905
----------- -----------
Total Current Assets .................................... 1,744,427 1,828,477
----------- -----------
DEFERRED DEBITS (note 6)
Property Abandonments - net.............. .................... 52,573 70,120
Oil and Gas Property Write-Down............................... 30,924 36,078
Unamortized Debt Expense ..................................... 139,067 123,833
Deferred OPEB Costs (notes 1 and 14).......................... 226,171 167,189
Unrecovered Environmental Costs (notes 3 and 13).............. 125,900 130,070
Unrecovered Plant and Regulatory Study Costs ................. 33,941 35,150
Underrecovered Electric Energy and Gas Costs - net
(notes 3 and 6)............................................. 176,055 170,565
Unrecovered SFAS 109 Deferred Income Taxes (note 11).......... 751,763 769,136
Deferred Decontamination and Decommissioning Costs (note 4)... 46,643 49,872
Other ........................................................ 56,730 5,826
----------- -----------
Total Deferred Debits ................................... 1,639,767 1,557,839
----------- -----------
Total .......................................................... $16,915,331 $16,816,491
=========== ===========

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)

December 31, December 31,
1996 1995
------------ ------------

CAPITALIZATION (notes 5 and 7)
Common Equity:
Common Stock ................................................. $ 3,626,792 $ 3,801,157
Retained Earnings ............................................ 1,586,256 1,636,971
----------- ------------
Total Common Equity ....................................... 5,213,048 5,438,128
Subsidiaries' Preferred Securities:
Preferred Stock Without Mandatory Redemption ................. 113,392 324,994
Preferred Stock With Mandatory Redemption .................... 150,000 150,000
Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures.................................... 210,000 210,000
Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures..................................... 208,000 --
Long-Term Debt ................................................. 4,580,231 5,189,791
----------- ------------
Total Capitalization ...................................... 10,474,671 11,312,913
----------- ------------
OTHER LONG-TERM LIABILITIES
Decontamination, Decommissioning and Low Level Radwaste
Costs (note 4).................... ........................... 46,643 50,449
Environmental Costs (notes 3 and 13)............................ 85,755 96,272
Capital Lease Obligations (note 12)............................. 52,371 53,111
----------- ------------
Total Other Long-Term Liabilities ....................... 184,769 199,832
----------- ------------
CURRENT LIABILITIES
Long-Term Debt due within one year ............................. 547,981 61,060
Commercial Paper and Loans (note 7)............................. 638,051 567,316
Book Overdrafts ................................................ 106,372 70,014
Accounts Payable ............................................... 590,932 538,585
Other Taxes Accrued ............................................ 31,577 30,816
Interest Accrued ............................................... 95,800 108,245
Provision for Rate Refund....................................... 89,210 13,810
Other .......................................................... 171,831 158,180
----------- ------------
Total Current Liabilities ................................. 2,271,754 1,548,026
----------- ------------
DEFERRED CREDITS
Deferred Income Taxes (note 11)................................. 3,250,343 3,083,426
Deferred Investment Tax Credits ................................ 361,786 392,324
Deferred OPEB Costs (notes 1 and 14)............................ 226,171 167,189
Other .......................................................... 145,837 112,781
----------- -----------
Total Deferred Credits .................................... 3,984,137 3,755,720
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (note 13) -- --
----------- -----------
Total ............................................................ $16,915,331 $16,816,491
=========== ===========

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)

For the Years Ended December 31,
---------------------------------------
1996 1995 1994
---------- ---------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................... $ 611,596 $ 662,323 $ 679,033
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization ...................................... 607,293 596,966 555,461
Amortization of Nuclear Fuel ....................................... 59,881 75,028 95,173
(Deferral) Recovery of Electric Energy and Gas Costs - net ......... (5,490) 1,998 (110,529)
Unrealized Gains on Investments - net .............................. (6,982) (46,668 (26,329)
Provision for Deferred Income Taxes - net .......................... 64,724 133,898 103,051
Investment Tax Credits - net ....................................... (28,805) (20,142 (20,247)
Allowance for Funds Used During Construction - Debt and
Equity and Capitalized Interest .................................. (18,155) (38,163) (42,588)
Proceeds from Leasing Activities ................................... 88,970 37,652 27,682
Changes in certain current assets and liabilities:
Net (increase) decrease in Accounts Receivable and Unbilled
Revenues ......................................................... (11,510) (169,148) 66,609
Net (increase) decrease in Inventory - Fuel and Materials and
Supplies ......................................................... (63,675) 18,589 41,163
Net increase (decrease) in Accounts Payable ........................ 24,049 116,029 (73,283)
Net increase (decrease) in Provision for Rate Refund................ 75,400 (8,143) 19,538
Net increase (decrease) in Other Accrued Taxes ..................... 761 (17,492) (257,897)
Net change in Other Current Assets and Liabilities ................. 11,475 20,222 19,423
Other .............................................................. (28,693) 68,318 75,371
Net cash provided by operating activities - Discontinued
Operations ....................................................... 53,621 103,606 92,147
----------- ---------- ----------
Net Cash provided by operating activities ....................... 1,434,460 1,534,873 1,243,778
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant, excluding AFDC ........................... (585,929) (649,883) (849,174)
Net decrease (increase) in Long-Term Investments and Real
Estate ............................................................. 4,916 (66,374) 59,647
Contribution to Decommissioning Funds and Other Special
Funds ............................................................... (29,280) (29,617) (35,394)
Cost of Plant Removal - net .......................................... (33,503) (29,674) (33,962)
Other ................................................................ (18,113) (46,715) 7,093
Change in Net Assets - Discontinued Operations ....................... (51,568) (113,042) (158,630)
Net Proceeds from the Sale of Discontinued Operations ................ 704,252 -- --
----------- ---------- ------------
Net cash used in investing activities ........................... (9,225) (935,305) (1,010,420)
----------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in Short-Term Debt ........................... 70,735 357,981 (86,050)
Increase (decrease) in Book Overdrafts ............................... 36,358 (16,562) 23,584
Issuance of Long-Term Debt ........................................... 373,500 156,320 849,800
Redemption of Long-Term Debt ......................................... (808,241) (556,294) (593,790)
Long-Term Debt Issuance and Redemption Costs ......................... (40,370) (14,176) (29,198)
Issuance of Preferred Stock .......................................... -- -- 75,000
Redemption of Preferred Stock ........................................ (211,602) (60,000) (120,000)
Issuance of Preferred Securities of Subsidiaries...................... 208,000 60,000 150,000
Issuance of Common Stock ............................................. -- -- 28,495
Retirement of Common Stock ........................................... (307,412) -- --
Cash Dividends Paid on Common Stock .................................. (522,565) (528,548) (528,071)
Other ................................................................ (6,699) (1,814) (6,970)
----------- ---------- ------------
Net cash used in financing activities ........................... (1,208,296) (603,093) (237,200)
----------- ---------- ------------
Net increase (decrease) in Cash and Cash Equivalents .................. 216,939 (3,525) (3,842)
Cash and Cash Equivalents at Beginning of Period ....................... 61,964 65,489 69,331
----------- ---------- ------------
Cash and Cash Equivalents at End of Period ............................. $ 278,903 $ 61,964 $ 65,489
=========== ========== ============

Income Taxes Paid ...................................................... $ 156,656 $ 185,376 $ 155,104
Interest Paid .......................................................... $ 462,877 $ 481,264 $ 432,873

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Thousands of Dollars)

For the Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------- ------------ ------------

Balance at Beginning of Period ............... $ 1,636,971 $ 1,505,010 $ 1,361,018
Add:
Net Income ................................... 611,596 662,323 679,033
------------- ------------ ------------

Total 2,248,567 2,167,333 2,040,051
------------- ------------ ------------

Deduct:
Cash Dividends on Common Stock ............. 522,565 528,548 528,071
Retirement of Common Stock ................. 133,047 - -
Preferred Securities Issuance Expenses ..... 6,699 1,814 6,970
------------- ------------ ------------

Total Deductions ...................... 662,311 530,362 535,041
------------- ------------ ------------

Balance at End of Period ..................... $ 1,586,256 $ 1,636,971 $ 1,505,010
============= ============ ============

Note: The ability of Enterprise to declare and pay dividends is
contingent upon its receipt of dividend payments from its
subsidiaries. PSE&G, Enterprise's principal subsidiary, has
restrictions on the payment of dividends which are contained in its
Restated Certificate of Incorporation, as amended, and certain of
the debentures supplemental to its Mortgage and certain other
indentures. However, none of these restrictions presently limits
the payment of dividends out of current earnings. The amount of
PSE&G's restricted retained earnings at December 31, 1996, 1995 and
1994 was $10 million. There are no restrictions on EDHI's retained
earnings. See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)

For the Years Ended December 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------

OPERATING REVENUES
Electric $ 3,944,362 $ 4,020,842 $ 3,739,713
Gas 1,880,994 1,686,403 1,778,528
------------- ------------- -------------
Total Operating Revenues 5,825,356 5,707,245 5,518,241
------------- ------------- -------------

OPERATING EXPENSES
Operation
Fuel for Electric Generation
and Interchanged Power 918,514 891,782 695,763
Gas Purchased 1,117,716 961,539 1,036,701
Other 981,559 949,400 959,859
Maintenance 318,280 312,610 308,080
Depreciation and Amortization 604,245 591,114 551,372
Taxes
Federal Income Taxes (note 11) 265,376 321,433 294,529
New Jersey Gross Receipts Taxes 598,016 612,961 583,167
Other 75,169 70,904 76,100
------------- ------------- -------------
Total Operating Expenses 4,878,875 4,711,743 4,505,571
------------- ------------- -------------

OPERATING INCOME 946,481 995,502 1,012,670
------------- ------------- -------------

OTHER INCOME (EXPENSES)
Allowance for Funds Used During
Construction - Equity -- 5,324 12,789
Miscellaneous - net (1,942) 7,728 6,233
------------- ------------- -------------
Total Other Income (Expenses) (1,942) 13,052 19,022
------------- ------------- -------------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES 944,539 1,008,554 1,031,692
------------- ------------- -------------

Interest Charges (note 7)
Long-Term Debt 343,351 357,584 366,894
Short-Term Debt 26,014 20,740 18,175
Other 29,216 28,545 10,856
------------- ------------- -------------
Total Interest Charges 398,581 406,869 395,925

Allowance for Funds Used During
Construction - Debt (16,854) (30,943) (25,319)
------------- ------------- -------------
Net Interest Charges 381,727 375,926 370,606
------------- ------------- -------------

Preferred Securities Dividend
Requirements of Subsidiaries
(note 5) 27,741 15,664 1,680
------------- ------------- -------------

NET INCOME 535,071 616,964 659,406
------------- ------------- -------------

Preferred Stock Dividend Requirements
(note 5) 23,161 33,762 40,467
Net Gain (Loss) on Preferred Stock
Redemptions (note 5) 18,177 (474) --
------------- ------------- -------------

EARNINGS AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED $ 530,087 $ 582,728 $ 618,939
============= ============= =============

See notes to Consolidated Financial Statements.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands of Dollars)

December 31, December 31,
1996 1995
------------ ------------

UTILITY PLANT - Original cost (note 16)
Electric ...................................................... $ 13,314,033 $ 13,095,103
Gas ........................................................... 2,555,901 2,442,572
Common ........................................................ 530,185 517,104
------------ ------------
Total .................................................... 16,400,119 16,054,779
Less: Accumulated depreciation and amortization ............... 5,889,098 5,440,414
------------ ------------
Net ...................................................... 10,511,021 10,614,365
Nuclear Fuel in Service, net of accumulated amortization -
1996, $259,384; 1995, $297,435............... .............. 198,845 180,018
------------ ------------
Net Utility Plant in Service ............................. 10,709,866 10,794,383
Construction Work in Progress, including Nuclear Fuel in
Process - 1996, $70,455; 1995, $104,743.. ................... 445,321 369,082
Plant Held for Future Use ..................................... 23,966 23,966
------------ ------------
Net Utility Plant ........................................ 11,179,153 11,187,431
------------ ------------
INVESTMENTS AND OTHER NONCURRENT ASSETS
Long-Term Investments, net of amortization - 1996, $12,679;
1995, $6,009, and net of valuation allowances - 1996,
$13,969; 1995, $ - (note 8)................................. 133,342 119,474
Nuclear Decommissioning and Other Special Funds (note 4)....... 382,348 313,178
Other Plant, net of accumulated depreciation and
amortization - 1996, $1,171; 1995, $1,905.................... 19,157 24,976
------------ ------------
Total Investments and Other Noncurrent Assets ............ 534,847 457,628
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents (note 10)............................ 47,639 32,373
Accounts Receivable:
Customer Accounts Receivable ................................ 499,858 525,404
Other Accounts Receivable ................................... 175,009 157,525
Less: Allowance for Doubtful Accounts ....................... 42,283 38,003
Accounts Receivable - Associated Companies (note 19)........... 4,308 --
Unbilled Revenues ............................................. 248,504 246,876
Fuel, at average cost ......................................... 313,019 253,360
Materials and Supplies, at average cost, net of inventory
valuation reserves - 1996, $16,100; 1995, $20,100 ........... 147,757 143,741
Deferred Income Taxes (note 11)................................ 23,210 27,571
Miscellaneous Current Assets .................................. 30,409 37,130
------------ ------------
Total Current Assets ..................................... 1,447,430 1,385,977
------------ ------------
DEFERRED DEBITS (note 6)
Property Abandonments - net.................................... 52,573 70,120
Oil and Gas Property Write-Down................................ 30,924 36,078
Unamortized Debt Expense....................................... 137,606 122,049
Deferred OPEB Costs (notes 1 and 14)........................... 226,171 167,189
Unrecovered Environmental Costs (notes 3 and 13)............... 125,900 130,070
Unrecovered Plant and Regulatory Study Costs .................. 33,941 35,150
Underrecovered Electric Energy and Gas Costs - net
(notes 3 and 6).............................................. 176,055 170,565
Unrecovered SFAS 109 Deferred Income Taxes (note 11)........... 751,763 769,136
Deferred Decontamination and Decommissioning Costs (note 4).... 46,643 49,872
Other ......................................................... 56,348 5,700
------------ ------------
Total Deferred Debits .................................... 1,637,924 1,555,929
------------ ------------
Total ........................................................... $ 14,799,354 $ 14,586,965
============ ============

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)

December 31, December 31,
1996 1995
------------ ------------

CAPITALIZATION (notes 5 and 7)
Common Equity:
Common Stock .................................................... $ 2,563,003 $ 2,563,003
Contributed Capital from Enterprise ............................. 594,395 594,395
Retained Earnings ............................................... 1,365,003 1,365,915
------------ -----------
Total Common Equity .......................................... 4,522,401 4,523,313
Preferred Stock Without Mandatory Redemption ...................... 113,392 324,994
Preferred Stock With Mandatory Redemption ........................ 150,000 150,000
Subsidiaries' Preferred Securities:
Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures....................................... 210,000 210,000
Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures........................................ 208,000 --
Long-Term Debt .................................................... 4,107,331 4,586,268
------------ ------------
Total Capitalization ......................................... 9,311,124 9,794,575
------------ ------------
OTHER LONG-TERM LIABILITIES
Decontamination, Decommissioning and Low Level Radwaste
Costs (note 4)................................................... 46,643 50,449
Environmental Costs (notes 3 and 13)............................... 85,755 96,272
Capital Lease Obligations (note 12)................................ 52,371 53,111
------------ ------------
Total Other Long-Term Liabilities ............................ 184,769 199,832
------------ ------------
CURRENT LIABILITIES
Long-Term Debt due within one year ................................ 423,500 --
Commercial Paper and Loans (note 7)... ............................ 638,051 567,316
Book Overdrafts ................................................... 106,372 70,014
Accounts Payable .................................................. 520,651 481,632
Accounts Payable - Associated Companies - net (note 19)............ -- 8,011
Other Taxes Accrued ............................................... 33,745 32,767
Interest Accrued .................................................. 86,674 95,811
Provision for Rate Refund.......................................... 89,210 13,810
Other ............................................................. 132,113 141,910
------------ ------------
Total Current Liabilities .................................... 2,030,316 1,411,271
------------ ------------
DEFERRED CREDITS
Deferred Income Taxes (note 11)................................. 2,557,587 2,535,603
Deferred Investment Tax Credits .................................. 351,637 370,610
Deferred OPEB Costs (notes 1 and 14)............................... 226,171 167,189
Other ............................................................. 137,750 107,885
------------ ------------
Total Deferred Credits ....................................... 3,273,145 3,181,287
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (note 13) -- --
------------ ------------
Total ............................................................... $ 14,799,354 $ 14,586,965
============ ============

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)

For the Years Ended December 31,
------------------------------------------------
1996 1995 1994
------------ ------------ -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income .............................................................. $ 535,071 $ 616,964 $ 659,406
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization ......................................... 604,245 591,114 551,372
Amortization of Nuclear Fuel .......................................... 59,881 75,028 95,173
(Deferral) Recovery of Electric Energy and Gas Costs - net ............ (5,490) 1,998 (110,529)
Provision for Deferred Income Taxes - net ............................. 39,357 79,321 108,163
Investment Tax Credits - net .......................................... (18,973) (19,111) (19,208)
Allowance for Funds Used During Construction - Debt and Equity ........ (16,854) (36,267) (38,108)
Changes in certain current assets and liabilities:
Net decrease (increase) in Accounts Receivable and Unbilled
Revenues ............................................................ 6,406 (142,770) 74,891
Net (increase) decrease in Inventory - Fuel and Materials
and Supplies ........................................................ (63,675) 18,589 41,163
Net increase (decrease) in Accounts Payable ........................... 31,008 102,961 (99,788)
Net increase (decrease) in Provision for Rate Refund................... 75,400 (8,143) 19,538
Net increase (decrease) in Other Accrued Taxes ........................ 978 (11,071) (261,037)
Net change in Other Current Assets and Liabilities .................... (7,852) 6,043 16,707
Other ................................................................... (36,056) 57,159 27,763
------------ ------------ ----------
Net cash provided by operating activities .......................... 1,203,446 1,331,815 1,065,506
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant, excluding AFDC .............................. (585,929) (649,883) (849,174)
Net (increase) decrease in Long-Term Investments ....................... (21,217) (65,189) 50,668
Contribution to Decommissioning Funds and Other Special
Funds .................................................................. (29,280) (29,617) (35,394)
Cost of Plant Removal - net ............................................. (33,503) (29,674) (33,962)
Other ................................................................... 5,819 859 1,692
------------ ------------ ----------
Net cash used in investing activities .............................. (664,110) (773,504) (866,170)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in Short-Term Debt .............................. 70,735 165,557 (130,969)
Increase (decrease) in Book Overdrafts .................................. 36,358 (16,562) 23,584
Issuance of Long-Term Debt .............................................. 373,500 156,320 849,800
Redemption of Long-Term Debt ............................................ (428,937) (367,039) (478,950)
Long-Term Debt Issuance and Redemption Costs ........................ (36,141) (13,462) (29,731)
Issuance of Preferred Stock ............................................. -- -- 75,000
Redemption of Preferred Stock ........................................... (211,602) (60,000) (120,000)
Net Gain (loss) on Preferred Stock Redemptions .......................... 18,177 (474) --
Issuance of Preferred Securities of Subsidiaries......................... 208,000 60,000 150,000
Contributed Capital ..................................................... -- 60,000 --
Cash Dividends Paid ..................................................... (547,461) (535,962) (545,767)
Other ................................................................... (6,699) (1,814) (6,970)
------------ ------------ ----------
Net cash used in financing activities .............................. (524,070) (553,436) (214,003)
------------ ------------ ----------
Net increase (decrease) in Cash and Cash Equivalents ................. 15,266 4,875 (14,667)
Cash and Cash Equivalents at Beginning of Period ....................... 32,373 27,498 42,165
------------ ------------ ----------
Cash and Cash Equivalents at End of Period .............................. $ 47,639 $ 32,373 $ 27,498
============ ============ ==========

Income Taxes Paid ....................................................... $ 254,141 $ 279,873 $ 209,196
Interest Paid ........................................................... $ 391,783 $ 399,509 $ 345,867

See Notes to Consolidated Financial Statements.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Thousands of Dollars)

For the Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------- ------------- -------------

Balance at Beginning of Period ................ $ 1,365,915 $ 1,287,201 $ 1,180,532
Add:
Net Income .................................... 535,071 616,964 659,406
------------- -------------- -------------

Total .................................... 1,900,986 1,904,165 1,839,938
------------- -------------- -------------

Deduct Cash Dividends:
Preferred Stock, at
required rates .............................. 23,161 33,762 40,467
Common Stock ................................ 524,300 502,200 505,300
Preferred Securities Issuance Expenses ...... 6,699 1,814 6,970
------------- -------------- -------------

Total Deductions .................. 554,160 537,776 552,737
------------- -------------- -------------

Net Gain (Loss) on Preferred Stock
Redemptions .................................. 18,177 (474) --
------------- -------------- -------------

Balance at End of Period ...................... $ 1,365,003 $ 1,365,915 $ 1,287,201
============= ============== =============

Note: PSE&G has restrictions on the payment of dividends which are
contained in its Restated Certificate of Incorporation, as amended,
and certain of the debentures supplemental to its Mortgage and
certain other indentures. However, none of these restrictions
presently limits the payment of dividends out of current earnings.
The amount of PSE&G's restricted retained earnings at December 31,
1996, 1995 and 1994 was $10 million. See Notes to Consolidated
Financial Statements.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Enterprise has two direct wholly owned subsidiaries, Public Service
Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings
Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating
public utility providing electric and gas service in certain areas in the State
of New Jersey.

EDHI is the parent of Enterprise's non-utility businesses: Community Energy
Alternatives Incorporated (CEA), an investor in, and developer and operator of,
cogeneration and independent power production (IPP) facilities and exempt
wholesale generators (EWGs); Public Service Resources Corporation (PSRC), which
has made primarily passive investments; Energis Resources Incorporated (ERI),
which provides total energy services to industrial and commercial customers both
within and outside of PSE&G's traditional service territory (see Competitive
Environment) and Enterprise Group Development Corporation (EGDC), a
nonresidential real estate development and investment business. EDHI also has
two finance subsidiaries: PSEG Capital Corporation (Capital), which provides
privately placed debt financing on the basis of a minimum net worth maintenance
agreement with Enterprise and Enterprise Capital Funding Corporation (Funding),
which provides privately placed debt financing guaranteed by EDHI, but without
direct support from Enterprise. EDHI has been conducting a controlled exit from
the real estate business since 1993. In July 1996, EDHI sold Energy Development
Corporation (EDC), an oil and gas subsidiary.

Summary of Significant Accounting Policies

Regulation--PSE&G

The accounting and rates of PSE&G are subject, in certain respects, to the
requirements of the New Jersey Board of Public Utilities (BPU) and the Federal
Energy Regulatory Commission (FERC). As a result, PSE&G maintains its accounts
in accordance with their prescribed Uniform Systems of Accounts, which are the
same. The application of Generally Accepted Accounting Principles (GAAP) by
PSE&G differs in certain respects from applications by non-regulated businesses.
PSE&G prepares its financial statements in accordance with the provisions of
Statement of Financial Accounting Standards No. 71--"Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that
accounting for rate-regulated enterprises should reflect the relationship of
costs and revenues. As a result, a regulated utility may defer recognition of
costs (a regulatory asset) or recognize obligations (a regulatory liability) if
it is probable that, through the rate-making process, there will be a
corresponding increase or decrease in revenues. Accordingly, PSE&G has deferred
certain costs, which will be amortized over various periods. To the extent that
collection of such costs or payment of liabilities is no longer probable as a
result of changes in regulation and/or PSE&G's competitive position, the
associated regulatory asset or liability will be reversed with a charge or
credit to income (see Note 6--Deferred Items). If PSE&G were to discontinue the
application of SFAS 71, the accounting impact would be an extraordinary, noncash
charge to operations that could be material to the financial position, results
of operations or net cash flows of Enterprise and PSE&G.

Amounts charged to operations for depreciation expense reflect estimated
useful lives and methods, which include estimates of cost of removal and
salvage, prescribed and approved by regulators rather than those that might
otherwise apply to non-regulated enterprises. PSE&G cannot presently quantify
what the financial statement impact may be if depreciation expense were to be
determined absent regulation.

Consolidation Policy

The consolidated financial statements include the accounts of Enterprise
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications of prior year
data have been made to conform with the current presentation.

Unamortized Debt Expense

Gains, losses and the costs of issuing and redeeming long-term debt for
PSE&G are deferred and amortized over the life of the applicable debt.

Utility Plant--PSE&G

Additions to utility plant and replacements of units of property are
capitalized at original cost. The cost of maintenance, repair and replacement of
minor items of property is charged to appropriate expense accounts. At the time
units of depreciable property are retired or otherwise disposed, the original
cost less net salvage value is charged to accumulated depreciation.

Depreciation and Amortization

Depreciation is computed under the straight-line method. Depreciation is
based on estimated average remaining lives of the several classes of depreciable
property. These estimates are reviewed on a periodic basis and necessary
adjustments are made as approved by the BPU. Depreciation rates stated in
percentages of original cost of depreciable property were 3.53% in 1996, 3.52%
in 1995 and 3.51% in 1994.

Nuclear Fuel burnup costs are charged to fuel expense on a
units-of-production basis over the estimated life of the fuel. Rates for the
recovery of fuel used at all nuclear units include a provision of one mill per
kilowatt-hour (KWH) of nuclear generation for spent fuel disposal costs (see
Note 4--PSE&G Nuclear Decommissioning ).

Use of Estimates

The process of preparing financial statements in conformity with GAAP
requires the use of estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.

Decontamination and Decommissioning--PSE&G

In 1993, FERC issued Order No. 557 regarding the accounting and rate-making
treatment of special assessments levied under the National Energy Policy Act of
1992 (EPAct). Order No. 557 provides that special assessments are a necessary
and reasonable current cost of fuel and shall be fully recoverable in rates in
the same manner as other fuel costs. By Order dated December 31, 1996 (December
31st Order), the BPU approved a settlement that provides that PSE&G can continue
to follow deferred accounting treatment for the non-energy components of the
Electric Levelized Energy Adjustment Clause (LEAC). The parties to the December
31st Order, including the New Jersey Division of Ratepayer Advocate and BPU
Staff, reserved the right to review the reasonableness of these costs in a
future proceeding, prior to recovery from customers (see Note 4--PSE&G Nuclear
Decommissioning and Amortization of Nuclear Fuel).

Allowance for Funds Used During Construction (AFDC)--PSE&G

AFDC represents the cost of debt and equity funds used to finance the
construction of new utility facilities. The amount of AFDC capitalized is
reported in the Consolidated Statements of Income as a reduction of interest
charges for the borrowed funds component and as other income for the equity
funds component. The rates used for calculating AFDC in 1996, 1995 and 1994 were
5.83%, 6.98% and 6.48%, respectively.

Revenues and Fuel Costs--PSE&G

Revenues are recorded based on services rendered to customers during each
accounting period. PSE&G records unbilled revenues representing the estimated
amount customers will be billed for services rendered from the time meters were
last read to the end of the respective accounting period. Rates include
projected fuel costs for electric generation, purchased and interchanged power
and gas purchased.

Any LEAC and Levelized Gas Adjustment Charge (LGAC) underrecoveries or
overrecoveries, together with interest (in the case of net overrecoveries), are
deferred and included in operations in the period in which they are reflected in
rates (see Note 3--Rate Matters).

Financial Instruments

Gains and losses on hedges of existing assets or liabilities are included
in the carrying amounts of those assets and liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses related
to qualifying hedges of firm commitments or anticipated transactions also are
deferred and recognized in income or as adjustments of carrying amounts when the
hedged transaction occurs (see Note 9--Financial Instruments and Risk
Management).

Income Taxes

Enterprise and its subsidiaries file a consolidated federal income tax
return and income taxes are allocated to Enterprise's subsidiaries based on the
taxable income or loss of each subsidiary. Investment tax credits are deferred
and amortized over the useful lives of the related property, including nuclear
fuel.

Benefit Plans

Non-represented employees of PSE&G commencing service before January 1,
1996, represented employees of PSE&G commencing employment before January 1,
1997 and certain employees of PSE&G's affiliated companies are covered by a
noncontributory trusteed pension plan (Pension Plan) from the date of hire.
Non-represented employees of PSE&G who commenced service after January 1, 1996,
represented employees of PSE&G who commence employment after January 1, 1997 as
well as certain employees of PSE&G's affiliated companies are covered by a Cash
Balance Pension Plan. The policy is to fund pension costs accrued (see Note
15--Pension Plan).

In 1993, Enterprise and PSE&G adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (SFAS 106) which requires that the expected cost of employees'
postretirement health care and life insurance benefits be charged to expense
during the years in which employees render service (see Note 14--Postretirement
Benefits Other Than Pensions).

Impairment of Long-Lived Assets

On January 1, 1996, Enterprise and PSE&G adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which requires
review for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS 121 did not have an impact on the results of operations,
financial condition or net cash flows of Enterprise and PSE&G. However, future
developments in the electric industry and utility regulation could jeopardize
the full recovery of the carrying cost of certain investments. Consequently,
Enterprise and PSE&G are monitoring the changing conditions facing the electric
utility industry.

Stock Based Compensation

Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (SFAS 123) is effective for fiscal years that begin
after December 15, 1995. SFAS 123 establishes financial accounting and reporting
standards for stock based compensation plans and includes all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or by which the employer incurs liabilities to employees in amounts
based on the price of the employer's stock. SFAS 123 provides an entity the
option to either adopt the new method or to continue to measure compensation
cost as prescribed by Accounting Principles Board Opinion No. 25 (APB 25)
"Accounting for Stock Issued to Employees" and provide proforma disclosure of
the effect of adopting SFAS 123. Enterprise has elected to continue its current
accounting treatment for stock compensation under APB 25. If stock based
compensation costs for Enterprise had been determined based on methodology
prescribed in SFAS 123, there would not have been a material effect on the
financial position, results of operations or net cash flows of Enterprise.

Note 2. Discontinued Operations

On July 1, 1996, EDHI entered into a contract for the sale of EDC to
Samedan Oil Corporation, a subsidiary of Noble Affiliates, Inc., for an
aggregate purchase price of $779 million subject to various purchase price
adjustments. As a result, Consolidated Financial Statements previously issued
have been restated to give effect to the classification of EDC as discontinued
operations. The sale, which was completed on July 31, 1996, resulted in an
after-tax gain of $13 million.

Operating results of EDC for 1996 (7 months), 1995, and 1994 are
summarized in the following table:

1996 1995 1994
(7 months)
------------- ------------ ----------
(Thousands of Dollars)
Revenues.............................. $128,353 $270,134 $234,608
Operating income...................... 24,551 80,786 43,938
Earnings before income taxes.......... 9,062 53,299 14,196
Income taxes.......................... (1,684) 18,263 1,684
Net income............................ 10,746 35,036 12,512

The net assets of EDC included in Enterprise's Consolidated Balance Sheet
at December 31, 1995 are summarized in the following table:

December 31,
1995
------------
(Thousands
of Dollars)
Property $608,015
Current assets, primarily receivables 90,986
Other assets 56,836
Current liabilities 62,204
Debt 311,821
Deferred credits and other liabilities 15,907
------------
Net assets $365,905
===========

Note 3. Rate Matters

Settlement of Certain Regulatory Issues

By Order dated December 31, 1996 (December 31st Order), the BPU approved a
settlement among PSE&G, the staff of the BPU (Staff) and the New Jersey Division
of Ratepayer Advocate addressing (i) the cost impact of the current shutdown of
Salem Units 1 and 2, including the "used and useful" issue related to the units
through December 31, 1998; (ii) the recovery of certain replacement power costs
associated with the 1994 Salem Unit 1 outage; and (iii) the recovery of capacity
costs associated with PSE&G's power purchases from cogeneration producers
through December 31, 1998. Under the December 31st Order, PSE&G has provided
electric customers with bill credits totaling $83.9 million in January and
February 1997 and PSE&G will forego recovery of $12 million associated with
energy costs that previously have been deferred. The resulting earnings loss of
$62.3 million or 26 cents per share of Enterprise common stock was previously
recorded ($59.0 million or 25 cents per share in the third quarter of 1996 and
$3.3 million or 1 cent per share in 1995).

Under the terms of the December 31st Order, Salem Units 1 and 2 will
continue in base rates without being subject to further refund and PSE&G will
assume all nuclear and fossil generating fuel and performance risks, including
replacement power costs associated with the Salem, Hope Creek and Peach Bottom
nuclear stations from January 1, 1997 through December 31, 1998. The BPU's
nuclear performance standard (NPS) will not apply to PSE&G from January 1, 1996
through December 31, 1998 (see Note 13--Commitments and Contingent Liabilities).
In addition, the energy component of PSE&G's LEAC will be fixed at its existing
level with no increase to customers until at least January, 1999. Any
underrecovered or overrecovered LEAC balance existing on December 31, 1998 will
not be considered in any LEAC review subsequent to that date. Any overrecovery
at that date will be applied to reduce any potential stranded costs and any
underrecovered balance will be charged to income in the period identified.

The December 31st Order provides PSE&G the opportunity, but no guarantee,
during the period January 1, 1997 through December 31, 1998, to fully recover
the December 31, 1996 underrecovered LEAC energy balance of $151.2 million
without any change in the current energy component of the LEAC charge.
Management believes that it will fully recover the underrecovered LEAC balance
by December 31, 1998 and will continue to follow deferred accounting treatment
for the LEAC.

In addition to the resolution of the Salem "used and useful" issue, the
December 31st Order addresses two other separate long-standing issues that PSE&G
had been litigating before the BPU. The first pertains to the recovery of
certain replacement power costs associated with a 58-day outage at Salem Unit 1
in 1994. The December 31st Order required PSE&G to reduce its underrecovered
LEAC balance by $7 million. The second pertains to the recovery of capacity
costs associated with electric utility power purchases from cogeneration
producers through December 31, 1998. The December 31st Order required PSE&G to
provide bill credits to electric customers totaling $6.4 million in during
January and February 1997. In addition, PSE&G reduced its underrecovered LEAC
balance by $5 million.

Through separate letter agreements, PSE&G and the Ratepayer Advocate agreed
on a commitment by PSE&G to provide financial assistance toward economic growth
and development in New Jersey. This commitment, which runs through December 31,
1999, has four key elements. First, PSE&G will create a $30 million revolving
economic development fund with emphasis on stimulating jobs and developing high
technology projects in urban areas. Second, PSE&G will provide incentives to
encourage local public housing authorities to replace up to 4,000 refrigerators
a year. Third, PSE&G will commit $1 million to develop a fund to provide
innovative assistance to low-income residents who are having difficulty paying
energy bills. Finally, PSE&G will develop a computer system to assist low-income
residents in identifying government and community programs from which they would
be eligible to receive benefits. On February 24, 1997, an intervenor's group
filed an appeal in New Jersey Superior Court seeking an invalidation of the
December 31st Order. PSE&G cannot predict the outcome of this appeal.

LGAC

On July 30, 1996, PSE&G filed its 1996/97 LGAC petition with the BPU
requesting that it be effective October 1, 1996 through December 31, 1997. PSE&G
has requested the LGAC be modified so as to more closely track the market price
of gas and avoid the distortions and dislocations resulting from the reflection
of over and underrecoveries. The 1996/97 LGAC proposal requested that
residential and certain other customer billings be converted from a levelized
charge to one derived on a monthly basis. The requested change in the LGAC
pricing is the same as the change in pricing for Large Volume Gas (LVG) and
General Service Gas (GSG) customers which was approved by the BPU in PSE&G's
1995/96 LGAC filing. In addition, there would be a cap of five cents per therm
in the month to month change in the 1996/97 LGAC rate for all customer classes.
PSE&G has also requested that the 1996/97 LGAC reflect a refund of approximately
$14 million to LVG and GSG customers in the form of bill credits, stemming from
over collections which occurred during the 1995/96 LGAC period.

On November 22, 1996, the BPU approved an approximate $80 million increase
based upon a modified Interim Stipulation in the LGAC proceeding. The BPU did
not approve PSE&G's 1996/1997 LGAC proposal that residential and certain other
customer billings be converted from an annual levelized charge to one derived on
a monthly basis. The monthly pricing methodology for LVG and GSG customers, with
minor modifications, will continue. During the months of December 1996 and
January 1997, approximately $14 million was refunded through bill credits to
customers that purchased LVG or GSG service (excluding off-peak service) during
the period January 1, 1996 through October 31, 1996. The refund was based on an
overcollection of gas costs from those customer classes and was apportioned
based on those customers' billed usage during that period. PSE&G, Staff and the
Ratepayer Advocate have the right to revisit all issues in a later proceeding.
PSE&G cannot predict the outcome of such a proceeding.

Electric Levelized Energy Adjustment Clause

On February 24, 1997, PSE&G filed with the BPU for an increase in the
Demand Side Adjustment Factor component of the LEAC, to become effective on or
before May 1, 1997. The filing would be effective for the period from May 1997
through December 1998 and requests an annualized increase of $151.8 million. The
filing includes recovery of demand side management (DSM)/conservation costs
related to BPU approved programs and would raise rates to a level sufficient to
recover such costs. At December 31, 1996, PSE&G had an underrecovered balance of
approximately $43 million related to these programs. Such amount is included in
other Deferred Debits on PSE&G's balance sheets. This underrecovery is expected
to grow to approximately $75 million by April 30, 1997. Approval of this filing
would result in recovery of this balance, as well as the costs of these programs
through December 1998. PSE&G cannot predict the outcome of this matter.

See Settlement of Certain Regulatory Issues for other LEAC matters.

Remediation Adjustment Charge (RAC)

In 1992, the BPU approved a mechanism for recovery of PSE&G's costs
associated with its Manufactured Gas Plant Remediation Program (Remediation
Program) since October 1, 1992, allowing the recovery of actual costs plus
carrying charges, net of insurance recoveries, over a seven-year period through
PSE&G's LGAC and LEAC, with 60% charged to gas customers and 40% charged to
electric customers. On November 22, 1996, the BPU approved an Interim LGAC
Stipulation regarding costs incurred during the period August 1, 1995 through
July 31, 1996. Under this Order, PSE&G is expected to recover $2.7 million from
gas customers and $1.8 million from electric customers during the period
November 1, 1996 through October 31, 1997.

Consolidated Tax Benefits

In a case affecting another utility in which neither Enterprise nor PSE&G
were parties, the BPU considered the extent to which tax savings generated by
non-utility affiliates included in the consolidated tax return of that utility's
holding company should be considered in setting that utility's rates. In 1992,
the BPU approved an order in such case treating certain consolidated tax savings
generated after June 30, 1990 by that utility's non-utility affiliates as a
reduction of its rate base. Also in 1992, the BPU issued an order resolving
PSE&G's 1992 base rate proceeding without separate quantification of the
consolidated tax issue. Such order did not provide final resolution of the
consolidated tax issue for any subsequent base rate filing. While Enterprise
continues to account for its two wholly-owned subsidiaries on a stand-alone
basis, resulting in a realization of tax benefits by the entity generating the
benefit, an ultimate unfavorable resolution of the consolidated tax issue could
reduce PSE&G's and Enterprise's revenues, net income or net cash flows. In
addition, an unfavorable resolution may adversely impact Enterprise's
non-utility investment strategy. Enterprise believes that PSE&G's taxes should
be treated on a stand-alone basis for rate-making purposes, based on the
separate nature of the utility and non-utility businesses. The issue of
Enterprise sharing the benefits of consolidated tax savings with PSE&G or its
ratepayers was addressed by the BPU in its July 28, 1996 letter which informed
PSE&G that the issue of consolidated tax savings can be discussed in the context
of PSE&G's next base rate case or plan for an alternative form of regulation.
However, neither Enterprise nor PSE&G is able to predict what action, if any,
the BPU may take concerning consolidation of tax benefits in future rate
proceedings (see Note 11--Federal Income Taxes).

Alternative Rate Plan

On January 16, 1996, PSE&G proposed to the BPU an alternative rate plan
that included an immediate $50 million rate reduction for its electric
customers, various types of rate freezes, assurances that future price increases
related to controllable costs will be lower than the rate of inflation and
funding of up to an aggregate of $55 million in two economic development
initiatives. As a result of the findings and filing requirements of the BPU's
draft Phase II report of the Master Plan (draft Phase II report), on January 31,
1997, PSE&G withdrew its alternative rate plan from further consideration.

Other Rate Matters

In 1995, the BPU initiated a generic proceeding that would eventually lead
to New Jersey electric utilities having the ability to offer "off-tariff"
negotiated rates to customers. Although these Off-Tariff Rate Agreements (OTRA)
are offered at PSE&G's sole discretion, they are subject to BPU approval of
minimum price, confidentiality of information, contract duration, regulatory
filing requirements and other reporting requirements. These negotiated OTRAs
form part of PSE&G's overall strategy to retain customers in its service
territory and maintain long term electric sales. To date, three OTRAs have been
filed with and approved by the BPU and PSE&G is currently in negotiations with
several other customers. PSE&G cannot predict what impact OTRAs may have on its
financial position, results of operations and net cash flows.

On August 1, 1996, the BPU initiated a generic proceeding to resolve the
regulatory and rate issues associated with SFAS 106. On January 8, 1997, the BPU
issued its Order adopting a stipulation of the parties to the proceeding
regarding SFAS 106 cost recovery mechanisms and initiating a second phase of the
generic proceeding requiring each utility's individual filing to obtain SFAS 106
accrual rate recognition under one of the rate mechanisms established in the BPU
Order. PSE&G cannot predict the outcome of this proceeding.

On September 19, 1996, PSE&G filed a petition with the BPU to establish an
interim Competitive Transition Charge (CTC). The CTC is designed to recover
stranded costs which may result from a customer leaving PSE&G's system as a full
requirements customer. If approved by the BPU as filed, this charge would apply
to customers who, after September 19, 1996, commit to an alternate source of
electric power while remaining physically located in PSE&G's electric franchise
area. Further, this interim charge would be limited to customers with present
billing demands in excess of 500KW. The proposed charge would be interim,
pending BPU resolution of the stranded cost issue on a generic basis in the
Energy Master Plan. PSE&G cannot predict what action the BPU may take with
respect to the CTC petition.

Recoverability of stranded costs is largely dependent on the transition
rules established by regulators, including the FERC and the BPU. Stranded costs
that could result as the industry moves to a more competitive environment
include investments in generating facilities, transmission assets, purchase
power agreements where the price being paid under such an agreement exceeds the
market price for electricity and regulatory assets for which recovery is based
solely on continued cost based regulation. Since the Energy Master Plan
proceeding is still in the proposal phase, and recognizing that the issue of
securitization and the extent of its application have not been determined, as
well as the potential need for legislative action, management cannot predict the
level of PSE&G's stranded costs or the extent to which regulators will allow
recovery of such costs.

Note 4. PSE&G Nuclear Decommissioning

The BPU decision in PSE&G's most recent base rate case utilized studies
based on the prompt removal/dismantlement method of decommissioning for all of
PSE&G's nuclear generating stations. This method consists of removing fuel,
source material and all other radioactive materials with activity levels above
accepted release limits from the nuclear sites. PSE&G has an ownership interest
in five nuclear units: Salem 1 and Salem 2--42.59% each, Hope Creek--95% and
Peach Bottom 2 and 3--42.49% each. In accordance with rate orders received from
the BPU, PSE&G has established an external master nuclear decommissioning trust
for all its nuclear units. This trust contains two separate funds: a qualified
fund and a non-qualified fund, due to an Internal Revenue Service (IRS) ruling.
Section 468A of the Internal Revenue Code limits the amount of money that can be
contributed into a "qualified" fund. Contributions made into a qualified fund
are tax deductible. PSE&G estimated the total cost of decommissioning its share
of these five nuclear units at $986 million in year end 1995 dollars (the year
that the most recent site specific estimates were prepared), excluding
contingencies. On December 23, 1996, PSE&G filed its 1995 nuclear plant
decommissioning cost update with the BPU. The filing included decommissioning
cost updates for PSE&G's respective ownership shares of its five nuclear units.
PSE&G's filing was based on site specific studies (year end 1995 dollars).

The most recent base rate decision provided that $15.6 million of such
costs are to be collected through base rates and an additional annual amount of
$7 million in 1993 and $14 million each year thereafter are to be recovered
through PSE&G's LEAC. At December 31, 1996 and 1995, the accumulated provision
for depreciation and amortization included reserves for nuclear decommissioning
for PSE&G's nuclear units of $338 million and $292 million, respectively. As of
December 31, 1996 and 1995, PSE&G had contributed $249 million and $220 million,
respectively, into independent, external, qualified and non-qualified nuclear
decommissioning trust funds. The fair market value of these funds as of December
31, 1996 and 1995 was $375 million and $311 million, respectively.

The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry, including PSE&G, regarding the
recognition, measurement and classification of nuclear decommissioning costs in
their financial statements. In response to these questions, the Financial
Accounting Standards Board (FASB) has agreed to review the accounting for
removal costs, including decommissioning. If current electric utility industry
accounting practices for decommissioning are changed: (1) annual provisions for
decommissioning could increase, (2) the estimated cost for decommissioning could
be recorded as a liability rather than as accumulated depreciation and (3) trust
fund income from the external decommissioning trusts could be reported as
investment income rather than as a reduction to decommissioning expense.

Uranium Enrichment Decontamination and Decommissioning Fund

In accordance with EPAct, domestic utilities that own nuclear generating
stations are required to pay a cumulative total of $150 million each year
(adjusted for inflation) into a decontamination and decommissioning fund, based
on their past purchases of U.S. government enrichment services. These amounts
are being collected over a period of 15 years or until $2.25 billion (adjusted
for inflation) has been collected. Under this legislation, PSE&G's obligation
for the nuclear generating stations in which it has an interest is $69 million
(adjusted for inflation). Since 1993, PSE&G has paid $22 million, resulting in a
balance due of $47 million. PSE&G has deferred the expenditures incurred to date
as part of deferred underrecovered electric energy costs (see Note 3--Rate
Matters).

Spent Nuclear Fuel Disposal Costs

In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered
into contracts with the Department of Energy (DOE) for the disposal of spent
nuclear fuel. Payments made to the DOE for disposal costs are based on nuclear
generation and are included in Fuel for Electric Generation and Net Interchanged
Power in the Statements of Income.
These costs are being recovered through the LEAC (see Note 3--Rate Matters).

Note 5. Schedule of Consolidated Capital Stock and Other Securities

Current
Redemption
Outstanding Price December 31, December 31,
Shares Per Share 1996 1995
-------------- -------------- --------------- --------------
(Thousands of Dollars)

Enterprise Common Stock (no par)--(Note A)--
Authorized 500,000,000 shares; issued and
outstanding at December 31, 1996, 233,470,291
shares and at December 31, 1995 and December
31, 1994, 244,697,930 shares $3,626,792 $3,801,157

Enterprise Preferred Securities (Note B)
PSE&G Cumulative Preferred Securities (Note C)
Without Mandatory Redemption (Notes D and E)
$100 par value series
4.08%........................................... 146,221 103.00 $ 14,622 $ 25,000
4.18%........................................... 116,958 103.00 11,696 24,994
4.30%........................................... 149,478 102.75 14,948 25,000
5.05%........................................... 104,002 103.00 10,400 25,000
5.28%........................................... 117,864 103.00 11,786 25,000
6.80%........................................... 188,684 102.00 18,869 25,000
6.92%........................................... 160,711 -- 16,071 60,000
7.40%........................................... -- -- -- 50,000
7.52%........................................... -- -- -- 50,000

$25 par value series
6.75%........................................... 600,000 -- 15,000 15,000
--------------- ---------------
Total Preferred Stock without Mandatory Redemption $ 113,392 $ 324,994
=============== ==============
With Mandatory Redemption (Notes D and F) $100
par value series
7.44%........................................... 750,000 -- $ 75,000 $ 75,000
5.97%........................................... 750,000 -- 75,000 75,000
--------------- ---------------
Total Preferred Stock with Mandatory Redemption... $ 150,000 $ 150,000
=============== ==============
Monthly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures (Notes D, F and G)
9.375%.......................................... 6,000,000 -- $ 150,000 $ 150,000
8.00%........................................... 2,400,000 -- 60,000 60,000
--------------- --------------
Total Monthly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures..... $ 210,000 $ 210,000
=============== ==============
Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's
Subordinated Debentures (Notes D, F and H)........
8.625%.......................................... 8,320,000 -- $208,000 --
---------------
Total Guaranteed Preferred Beneficial Interest
in PSE&G's
Subordinated Debentures......................... $208,000 --
===============

(A) In July 1996, Enterprise initiated a common stock repurchase program. As
of December 31, 1996, 11,227,639 shares had been repurchased for $307
million. The program concluded on January 17, 1997. The total number of
shares repurchased under the program was 12,740,322 at a cost of $350
million.

Total authorized and unissued shares include 7,302,488 shares of
Enterprise Common Stock reserved for issuance through Enterprise's
Dividend Reinvestment and Stock Purchase Plan and various employee
benefit plans. In 1996 and 1995, no shares of Enterprise Common Stock
were issued or sold through these plans.

(B) Enterprise has authorized a class of 50,000,000 shares of Preferred Stock
without par value, none of which is outstanding.

(C) At December 31, 1996, there were aggregates of 5,016,082 shares of $100
par value and 9,400,000 shares of $25 par value Cumulative Preferred
Stock which were authorized and unissued, and which upon issuance may or
may not provide for mandatory sinking fund redemption. If dividends upon
any shares of Preferred Stock are in arrears in an amount equal to the
annual dividend thereon, voting rights for the election of a majority of
PSE&G's Board of Directors become operative and continue until all
accumulated and unpaid dividends thereon have been paid, whereupon all
such voting rights cease, subject to being revived from time to time.

(D) At December 31, 1996, the annual dividend requirement and embedded
dividend rate for Preferred Stock without mandatory redemption was
$6,283,425 and 5.45%, respectively, and for Preferred Stock with
mandatory redemption was $10,057,500 and 6.75%, respectively.

At December 31, 1995, the annual dividend requirement and embedded
dividend rate for Preferred Stock without mandatory redemption was
$20,046,765 and 6.14%, respectively, and for Preferred Stock with
mandatory redemption was $10,057,500 and 6.75%, respectively.

At December 31, 1996 and 1995, the annual dividend requirement and
embedded cost of the Monthly Income Preferred Securities (Guaranteed
Preferred Beneficial Interest in PSE&G's Subordinated Debentures) was
$18,862,500 and 6.04%, respectively.

At December 31, 1996, the annual dividend requirement of the Quarterly
Income Preferred Securities (Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures) and their embedded costs were
$17,940,000 and 5.80%, respectively.

(E) On June 28, 1996, PSE&G redeemed all of the 500,000 shares of each of
its outstanding 7.52% and 7.40% cumulative preferred stock ($100 par), at
a redemption price of $101 per share.

In addition, PSE&G purchased an aggregate of 1,116,024 shares of its
4.08%, 4.18%, 4.30%, 5.05%, 5.28%, 6.80% and 6.92% Cumulative Preferred
Stock ($100 par) through a tender offer.

(F) For information concerning fair value of financial instruments, see Note
9--Financial Instruments and Risk Management.

(G) Public Service Electric and Gas Capital, L.P. was formed for the purpose
of issuing Monthly Income Preferred Securities (Monthly Guaranteed
Preferred Beneficial Interest in PSE&G's Subordinated Debentures). The
proceeds of Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures sales were lent to PSE&G and evidenced by PSE&G's
Deferrable Interest Subordinated Debentures. If and for as long as
payments on PSE&G's Deferrable Interest Subordinated Debentures have been
deferred, or PSE&G has defaulted on the indenture related thereto or its
guarantee thereof, PSE&G may not pay any dividends on its Common and
Preferred Stock.

(H) On June 26, 1996, PSE&G Capital Trust I (Trust), a special purpose
statutory business trust wholly owned by PSE&G, issued $208 million of
8.625% Quarterly Income Preferred Securities (Quarterly Guaranteed
Preferred Beneficial Interest in PSE&G's Subordinated Debentures). The
sole asset of the Trust is PSE&G's 8.625% Series A Deferrable Interest
Subordinated Debenture, evidenced by such loan, in an aggregate principal
amount of $214,433,000 with a stated maturity date of June 26, 2045. The
Subordinated Debentures and the Indenture constitute a full and
unconditional guarantee by PSE&G of the Preferred Securities issued by
the Trust.

Note 6. Deferred Items

Property Abandonments

The BPU has authorized PSE&G to recover after-tax property abandonment
costs from its customers. The following table reflects the application of
Statement of Financial Accounting Standards No. 90, "Regulated
Enterprises--Accounting for Abandonments and Disallowances of Plant Costs,"
(SFAS 90) on property abandonments, and related tax effects, for which no return
is earned. The net-of-tax discount rate used was between 4.868% and 5.292%.

Property Abandonments
----------------------------------------------------------------
December 31, 1996 December 31, 1995
----------------------------- --------------------------------
Discounted Discounted
Cost Taxes Cost Taxes
-------------- ------------- --------------- ---------------
(Thousands of Dollars)

Atlantic Project.................... $45,718 $19,178 $58,221 $24,440
LNG Project......................... 0 0 2,992 957
Uranium Projects.................... 6,855 3,019 8,907 3,871
============== ============= =============== ===============
$52,573 $22,197 $70,120 $29,268
============== ============= =============== ===============

Underrecovered Electric Energy and Gas Costs--net

Recoveries of electric energy and gas costs are determined by the BPU under
the LEAC and LGAC. PSE&G's deferred fuel balances as of December 31, 1996 and
1995 reflect underrecovered costs as follows:

December 31,
-----------------------------
1996 1995
-------------- -------------
(Millions of Dollars)
Underrecovered Electric Energy Costs..... $151.2 $162.4
Underrecovered Gas Fuel Costs............ 24.9 8.2
============== =============
Total $176.1 $170.6
============== =============

The December 31st Order provides PSE&G the opportunity, but no guarantee,
during the period January 1, 1997 through December 31, 1998, to fully recover
its December 31, 1996 underrecovered LEAC balance of $151.2 million without any
change in the current energy component of the LEAC charge. Management believes
that it will fully recover the underrecovered LEAC balance by December 31, 1998
and will continue to follow deferred accounting treatment for the LEAC.

Unrecovered Plant and Regulatory Study Costs

Amounts shown in the consolidated balance sheets consist of costs
associated with developing, consolidating and documenting the specific design
basis of PSE&G's jointly owned nuclear generating stations, as well as PSE&G's
share of costs associated with the cancellation of the Hydrogen Water Chemistry
System Project (HWCS Project) at Peach Bottom. PSE&G has received both BPU and
FERC approval to defer and amortize, over the remaining lives of the Salem, Hope
Creek and Peach Bottom nuclear units, costs associated with configuration
baseline documentation and the canceled HWCS Project.

Oil and Gas Property Write-Down

On December 31, 1992, the BPU approved the recovery of PSE&G's deferral of
an EDC write-down through PSE&G's LGAC over a ten-year period beginning January
1, 1993.

Note 7. Schedule of Consolidated Debt

LONG-TERM

December 31,
---------------------------------
Interest Rates Maturity 1996 1995
- ------------------------------------------------------ --------------- --------------- --------------
(Thousands of Dollars)

PSE&G
First and Refunding Mortgage
Bonds (Note A)
6.875%-7.125% 1997......... $300,000 $300,000
6.00% 1998......... 100,000 100,000
8.75% 1999......... 100,000 100,000
6.00%-7.625% 2000......... 400,000 400,000
7.875% 2001......... 100,000 100,000
6.125%-9.125% 2002-2006.... 1,200,000 1,200,000
6.25%-6.90% 2007-2011.... 152,990 2,990
6.75%-7.375% 2012-2016.... 398,500 198,500
Variable 2012-2016.... 66,120 42,620
6.45%-9.25% 2017-2021.... 172,980 375,600
Variable 2017-2021.... 13,700 13,700
5.20%-8.75% 2022-2026.... 689,362 917,500
5.70%-6.55% 2027-2031.... 349,200 349,200
5.45%-6.40% 2032-2036.... 295,200 295,200
5.00%-8.00% 2037......... 15,001 15,001
Medium-Term Notes
7.10%-7.13% 1997......... 100,000 100,000
8.10%-8.16% 2009......... 60,000 60,000
7.15%-7.18% 2023......... 40,500 40,500
--------------- --------------
Total First and Refunding Mortgage Bonds........................... 4,553,553 4,610,811
--------------- --------------
Debenture Bonds Unsecured
6.00% 1998......... 18,195 18,195
--------------- --------------
Total Debenture Bonds.............................................. 18,195 18,195
--------------- --------------
Principal Amount Outstanding (Note F)................................. 4,530,831 4,629,006
Amounts Due Within One Year (Note B).................................. (423,500) --
Net Unamortized Discount.............................................. (40,917) (42,738)
--------------- --------------
Total Long-Term Debt of PSE&G (Note G)............................. $4,107,331 $4,586,268
EDHI
Capital (Note C) Senior notes
9.875%--10.05% 1998......... $80,000 $122,500
Medium-Term Notes
9.00% 1996......... -- 20,000
5.79%-5.92% 1997......... 27,000 27,000
9.00% 1998......... 75,000 75,000
8.95%-9.93% 1999......... 155,000 155,000
6.54% 2000......... 78,000 78,000
--------------- --------------
Principal Amount Outstanding (Note F)................................. 415,000 477,500
Amount included in Net Assets of Discontinued Operations.............. -- (1,570)
Amounts Due Within One Year (Note B).................................. (69,481) (60,912)
Net Unamortized Discount.............................................. (619) (901)
=============== ==============
Total Long-Term Debt of Capital.................................... $344,900 $414,117
=============== ==============
Funding (Note D)
9.55% 1996......... $ -- $28,000
6.85%-9.59% 1997......... 55,000 55,000
9.95% 1998......... 83,000 83,000
7.58% 1999......... 45,000 45,000
--------------- --------------
Principal Amount Outstanding (Note F)................................. 183,000 211,000
Amount included in Net Assets of Discontinued Operations.............. -- (28,000)
Amounts Due Within One Year (Note B).................................. (55,000) --
=============== ==============
Total Long-Term Debt of Funding.................................... $128,000 $183,000
=============== ==============
EGDC Mortgage Notes
10.625%--12.75% (Note F) 2012........ $ -- $6,554
Amounts Due Within One Year........................................... -- (148)
--------------- --------------
Total Long-Term Debt of EGDC..................................... $ -- $6,406
=============== ==============
Total Long-Term Debt of EDHI..................................... $ 472,900 $603,523
=============== ==============
Consolidated Long-Term Debt (Note E).......................... $4,580,231 $5,189,791
=============== ==============

Notes:
(A) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage
lien on substantially all PSE&G's property and franchises.

During the year, PSE&G reacquired on the open market $75.1 million of its
8 1/2% Series LL First and Refunding Mortgage Bonds and $6.6 million of
its 9 1/4% Series CC First and Refunding Mortgage Bonds. On January 30,
1996, PSE&G issued $200 million and $150 million, respectively, principal
amount of its First and Refunding Mortgage Bonds 6 3/4% Series VV due
2016 and 6 1/4% Series WW due 2007, respectively.

(B) The aggregate principal amounts of mandatory requirements for sinking
funds and maturities for each of the five years following December 31,
1996 are as follows:

Sinking
Funds Maturities
--------------- ----------------------------------------------------------------------
Year Capital PSE&G Capital Funding Total
- --------------- --------------- --------------- ---------------- --------------- ----------------
(Thousands of Dollars)

1997......... $42,500 $400,000 $27,000 $55,000 $524,500
1998......... 37,500 118,195 75,000 83,000 313,695
1999......... -- 100,000 155,000 45,000 300,000
2000......... -- 400,000 78,000 -- 478,000
2001......... -- 100,000 -- -- 100,000
=============== =============== ================ =============== ================
$80,000 $1,118,195 $335,000 $183,000 $1,716,195
=============== =============== ================ =============== ================

(C) Capital has provided up to $750 million debt financing for EDHI's
businesses, except ERI, on the basis of a net worth maintenance agreement
with Enterprise. Effective January 31, 1995, Capital agreed to limit its
borrowings to no more than $650 million.

(D) Funding provides debt financing for EDHI's businesses, other than EGDC
and ERI, on the basis of an unconditional guarantee from EDHI.

(E) At December 31, 1996 and 1995, the annual interest requirement on
long-term debt was $369.9 million and $399.8 million, of which $302.0
million and $315.6 million, respectively, was the requirement for Bonds.
The embedded interest cost on long-term debt on such date was 7.62% and
7.71%, respectively.

(F) For information concerning fair value of financial instruments, see Note
9--Financial Instruments and Risk Management.

(G) At December 31, 1996 and 1995, PSE&G's annual interest requirement on
long-term debt was $316.8 million and $330.5 million, of which $302.0
million and $315.6 million, respectively, was the requirement for Bonds.
The embedded interest cost on long-term debt on such dates was 7.45% and
7.54%, respectively. The embedded interest cost on long-term debt due
within one year at December 31, 1996 was 7.46%.

SHORT-TERM (Commercial Paper and Loans)

Commercial paper represents unsecured bearer promissory notes sold through
dealers at a discount with a term of nine months or less.

Bank loans represent PSE&G's unsecured promissory notes issued under
informal credit arrangements with various banks and have a term of eleven months
or less.

PSE&G
1996 1995 1994
---- ---- ----
(Millions of Dollars)
---------------------
Principal amount outstanding at year end,
primarily commercial paper................... $638 $567 $402
Weighted average interest rate for
short-term debt at year end.................. 5.70% 5.93% 6.07%

PSE&G has authorization from the BPU to issue and have outstanding not more
than $1.3 billion of its short-term obligations at any one time, consisting of
commercial paper and other unsecured borrowings from banks and other lenders.
This authorization expires January 2, 1999.

PSE&G has a $1 billion commercial paper program (Program) supported by a
$500 million one year revolving credit agreement expiring in August 1997 and a
$500 million five year revolving credit agreement expiring in August 2000 with a
group of commercial banks. As of December 31, 1996, 1995 and 1994, PSE&G had
$443 million, $391 million and $258 million respectively, outstanding under the
Program, which amounts are included in the table above. As of December 31, 1996,
there was no debt outstanding under the revolving credit agreements.

PSE&G has $114 million in uncommitted lines of credit facilities extended
by a number of banks to primarily support short-term borrowings, of which $64
million was outstanding on December 31, 1996 and are included in the table
above.

PSE&G had various lines of credit facilities extended by banks to primarily
support the issuance of letters of credit. As of December 31, 1996, letters of
credit were issued in the amount of $20.6 million.

PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125
million revolving credit facility with a group of banks, which expires in March
2000. PSE&G has guaranteed repayment of Fuelco's respective obligations. As of
December 31, 1996, 1995 and 1994, Fuelco had commercial paper of $83.2 million,
$87.7 million and $93.7 million, respectively, outstanding under the commercial
paper program, which amounts are included in the table above. As of December 31,
1996, there was no debt outstanding under the revolving credit facility.

Public Service Conservation Resources Corporation (PSCRC) has a $30 million
revolving credit facility supported by a PSE&G subscription agreement in an
aggregate amount of $30 million which terminates on March 7, 1997. As of
December 31, 1996, PSCRC had $30 million outstanding under this facility, which
amount is included in the table above.

PSE&G has entered into standby financing arrangements with a bank totaling
$80 million. These facilities support tax-exempt multi-mode financings done
through the New Jersey Economic Development Authority and the York County
(Pennsylvania) Industrial Development Authority. As of December 31, 1996, no
amounts were outstanding under such arrangements.

EDHI

1996 1995 1994
---- ---- ----
(Millions of Dollars)
---------------------
Principal amount outstanding at year end........ -- $182 (A) $90 (A)
Weighted average interest rate for short-term
debt at year end.............................. -- 6.26% 5.97%

(A) Amounts included in Net Assets of Discontinued Operations.

Through July 31, 1996, Funding had a commercial paper program, supported by
a commercial bank letter of credit and credit facility, in the amount of $225
million. Additionally, Funding had a $225 million revolving credit facility.
Both facilities were scheduled to expire in March 1998. On July 31, 1996,
Funding amended and restated its commercial paper program and revolving credit
facility in conjunction with the sale of EDC, reducing the total amount from
$450 million to $300 million and extending the maturity from March 1998 to July
1999. The $225 million commercial paper program was eliminated and the $225
million revolving credit facility was increased to $300 million. As of December
31, 1996, Funding had no borrowings outstanding under the amended and restated
facility.

ENTERPRISE

At December 31, 1996, 1995 and 1994, Enterprise had a $25 million line of
credit with a bank. At those dates, Enterprise had no borrowings under this
line.

Note 8. Long-Term Investments

Long-Term Investments are primarily those of EDHI.

December 31,
---------------------------
1996 1995
------------- ------------
(Millions of Dollars)
Lease Agreements (see Note 12--Leasing
Activities):
Leveraged Leases....................... $ 932 $ 845
Direct-Financing Leases................ 33 35
Other Leases........................... 3 6
------------- ------------
Total............................. 968 886
------------- ------------
Partnerships:
General Partnerships................... 138 173
Limited Partnerships................... 495 518
------------- ------------
Total............................. 633 691
------------- ------------
Corporate Joint Ventures.................... 75 49
Securities.................................. 48 63
Other Investments........................... 130 119
============= ============
Total Long-Term Investments....... $ 1,854 $ 1,808
============= ============

PSRC's leveraged leases are reported net of principal and interest on
nonrecourse loans, unearned income and deferred tax credits. Income and deferred
tax credits are recognized at a level rate of return from each lease during the
periods in which the net investment is positive.

Partnership investments are those of PSRC, EGDC and CEA and are undertaken
with other investors. PSRC is a limited partner in various partnerships and is
committed to make investments from time to time upon the request of the
respective general partners. At December 31, 1996, $30 million remained as
PSRC's unfunded commitment subject to call.

Other investments relate primarily to PSCRC's investment in Demand Side
Management projects. PSCRC's investment balance at December 31, 1996 and 1995
was approximately $101 million and $91 million, respectively.

Note 9. Financial Instruments and Risk Management

Enterprise's operations give rise to exposure to market risks from changes
in natural gas prices, interest rates, foreign exchange rates and security
prices of investments. Enterprise's policy is to use derivatives for the purpose
of managing market risk consistent with its business plans and prudent
practices. Enterprise does not hold or issue financial instruments for trading
purposes.

Natural Gas Hedging

Through December 31, 1996 and 1995, ERI entered into futures contracts to
buy 10,810,000 mmbtu and 4,970,000 mmbtu of natural gas at average prices of
$2.10 per mmbtu and $1.78 per mmbtu, respectively, related to fixed-price sales
commitments. Such contracts, together with physical purchase contracts, hedged
approximately 95% and 91% of its fixed-price sales commitments at December 31,
1996 and 1995, respectively. ERI had deferred unrealized hedge gains of $3.6
million and $3.1 million at those respective dates.

Fair Value of Financial Instruments

The estimated fair value was determined using the market quotations or
values of securities with similar terms, credit ratings, remaining maturities
and redemptions at the end of 1996 and 1995, respectively.

December 31,
------------
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- --------
(Thousands of Dollars)

Long-Term Debt (A):
EDHI.................................................. $ 597,381 $ 606,000 $ 694,153 $ 731,000
PSE&G................................................. 4,530,831 4,591,947 4,586,268 4,828,008
Preferred Securities Subject to Mandatory Redemption:
PSE&G Cumulative Preferred Securities................. 150,000 151,875 150,000 156,000
Monthly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures.................... 210,000 220,200 210,000 225,300
Quarterly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures.................... 208,000 211,120 -- --

(A) Includes current maturities

Note 10. Cash and Cash Equivalents

The December 31, 1996 and 1995 balances consist primarily of working funds
and highly liquid marketable securities (commercial paper and money market
funds) with a maturity of three months or less.

Note 11. Federal Income Taxes

A reconciliation of reported Net Income with pretax income and of Federal
income tax expense with the amount computed by multiplying pretax income by the
statutory Federal income tax rate of 35% is as follows:

1996 1995 1994
-------------- -------------- ---------------
(Thousands of Dollars)
----------------------

Net Income....................................................... $ 611,596 $ 662,323 $ 679,033
Preferred securities (net)....................................... 4,984 34,236 40,467
Discontinued Operations.......................................... (24,238) (35,036) (12,512)
-------------- -------------- ---------------
Subtotal............................................... 592,342 661,523 706,988
-------------- -------------- ---------------
Federal income taxes:
Operating income:
Current provision........................................... 124,436 207,663 166,088
Provision for deferred income taxes--net(A)................. 187,479 152,222 167,155
Investment tax credits--net................................. (21,662) (21,919) (23,297)
-------------- -------------- ---------------
Total included in operating income..................... 290,253 337,966 309,946
Miscellaneous other income:
Current provision........................................... 537 (9,897) (8,186)
Provision for deferred income taxes(A)...................... 21 9,816 10,422
SFAS 90 deferred income taxes(A)............................ 1,781 2,161 2,530
-------------- -------------- ---------------
Total Federal income tax provisions.................... 292,592 340,046 314,712
============== ============== ===============
Pretax income.................................................... $ 884,934 $1,001,569 $1,021,700
============== ============== ===============

Reconciliation between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:

1996 1995 1994
-------------- --------------- --------------
(Thousands of Dollars)
----------------------

Tax computed at the statutory rate....................... $309,727 $350,549 $357,595

-------------- --------------- --------------
Increase (decrease) attributable to flow through of certain
tax adjustments:
Depreciation................................................ 11,031 16,257 (4,597)
Amortization of investment tax credits...................... (21,662) (21,919) (23,297)
Other....................................................... (6,504) (4,841) (14,989)
-------------- --------------- --------------
Subtotal............................................... (17,135) (10,503) (42,883)
============== =============== ==============
Total Federal income tax provisions.................... $292,592 $340,046 $314,712
============== =============== ==============
Effective Federal income tax rate................................ 33.1% 34.0% 30.8%

(A) The provision for deferred income taxes represents the tax effects of
the following items:

1996 1995 1994
--------------- --------------- --------------
(Thousands of Dollars)

Deferred Credits:
Additional tax depreciation and amortization................. $ 38,487 $133,764 $102,934
Leasing Activities........................................... 136,402 64,567 60,129
Property Abandonments........................................ (6,985) (7,411) (6,606)
Oil and Gas Property Write-Down.............................. (2,451) (2,451) (2,451)
Deferred Fuel Costs--net..................................... 6,533 (3,601) 39,361
Other........................................................ 17,295 (20,669) (13,260)
================ =============== ==============
Total................................................... $189,281 $164,199 $180,107
================ =============== ==============

Between the years 1987 and 1994, Enterprise's Federal Alternative Minimum
Tax (AMT) liability exceeded its regular Federal income tax liability. This
excess can be carried forward indefinitely to offset regular income tax
liability in future years. Enterprise commenced using these AMT credits in 1995
and expects to continue using them in future years as the regular tax liability
exceeds AMT. As of December 31, 1996, 1995 and 1994, Enterprise had AMT credits
of $88 million, $183 million and $225 million, respectively.

In March 1992, the IRS issued reports following its examination of PSE&G's
consolidated tax return for 1985 and Enterprise's consolidated tax returns for
1986 and 1987. The reports proposed an increase in tax liability of $121
million, primarily due to issues related to the Hope Creek nuclear unit.
Interest, after taxes, on the increased liability totaled an additional $119
million as of December 31, 1995. In August 1996, Enterprise reached an agreement
with the IRS covering most of the disputed issues. The partial agreement
included resolution of all disputed issues related to Hope Creek and did not
have a material impact on the financial position, results of operations or net
cash flows of PSE&G or Enterprise. While no assurances can be given regarding
the outcome of the remaining unresolved issues, an unfavorable resolution is not
expected to have a material adverse impact on the financial position, results of
operations or net cash flows of PSE&G or Enterprise.

Enterprise provides deferred taxes at the enacted statutory tax rate for
all temporary differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities irrespective of the treatment
for rate-making purposes. Management believes that it is probable that the
accumulated tax benefits that previously have been treated as a flow-through
item to PSE&G customers will be recovered from utility customers in the future.
Accordingly, an offsetting regulatory asset was established. As of December 31,
1996, PSE&G had a deferred tax liability and an offsetting regulatory asset of
$752 million representing the future revenue expected to be recovered through
rates based upon established regulatory practices which permit recovery of
current taxes payable. This amount was determined using the 1996 Federal income
tax rate of 35%.

The following is an analysis of deferred income taxes:

December 31,
-----------------------------
1996 1995
DEFERRED INCOME TAXES ------------- -------------
(Thousands of Dollars)

Assets:
Current (net)........................................... $23,210 $27,571
------------- -------------
Noncurrent:
Unrecovered Investment Tax Credits.................... 123,073 129,713
Nuclear Decommissioning............................... 27,156 25,241
Construction Period Interest and Taxes................ 16,292 17,199
Vacation Pay.......................................... 6,796 6,681
AMT Credit............................................ 87,806 183,237
Real Estate Impairment................................ 3,244 5,213
Other................................................. 22,948 4,108
------------- -------------
Total Noncurrent................................. 287,315 371,392
------------- -------------
Total Assets..................................... 310,525 398,963
------------- -------------
Liabilities:
Noncurrent:
Plant Related Items................................... 2,361,656 2,341,374
Leasing Activities.................................... 669,405 616,914
Property Abandonments................................. 16,281 21,469
Oil and Gas Property Write-Down....................... 11,196 13,061
Underrecovered Electric Energy & Gas Costs (net)...... 62,817 56,283
Unamortized Debt Expense.............................. 39,980 36,945
Taxes Recoverable Through Future Rates (net).......... 258,740 262,625
Other................................................. 117,583 106,147
------------- -------------
Total Noncurrent................................. 3,537,658 3,454,818
------------- -------------
Total Liabilities................................ 3,537,658 3,454,818
------------- -------------
Summary--Deferred Income Taxes
Net Current Assets...................................... 23,210 27,571
Net Deferred Liability.................................. 3,250,343 3,083,426
============= =============
Total.............................................. $3,227,133 $3,055,855
============= =============

Note 12. Leasing Activities

As Lessee

The Consolidated Balance Sheets include assets and related obligations
applicable to capital leases under which PSE&G is a lessee. The total
amortization of the leased assets and interest on the lease obligations equals
the net minimum lease payments included in rent expense for capital leases.
Capital leases of PSE&G relate primarily to its corporate headquarters and other
capital equipment. Certain of the leases contain renewal and purchase options as
well as escalation clauses. Enterprise and its other subsidiaries are not
lessees in any capitalized leases.

Utility plant includes the following amounts for capital leases at December
31:

1996 1995
--------------- ----------------
(Thousands of Dollars)
Common Plant........................ $58,610 $58,610
Less: Accumulated Amortization...... 6,239 5,499
=============== ================
Net Assets under Capital Leases..... $52,371 $53,111
=============== ================

Future minimum lease payments for non-cancelable capital and operating
leases at December 31, 1996 were:

Capital Operating
Leases Leases
----------- ----------------
(Thousands of Dollars)
1997............................................ $ 13,175 $ 11,190
1998............................................ 13,176 8,322
1999............................................ 13,177 7,621
2000............................................ 12,834 5,217
2001............................................ 12,810 4,403
Later Years..................................... 176,420 9,185
----------- ===========
Minimum Lease Payments.......................... $241,592 $ 45,938
===========
Less: Amount representing estimated executory
costs, together with any profit thereon,
included in minimum lease payments........ 119,606
-----------
Net minimum lease payments...................... 121,986
Less: Amount representing interest.............. 69,615
===========
Present value of net minimum lease
payments (A)................................. $ 52,371
===========

(A) Reflected in the Consolidated Balance Sheets for 1996 and 1995 were
Capital Lease Obligations of $52.371 million and $53.111 million which
includes Capital Lease Obligations due within one year of $829 thousand
and $739 thousand, respectively.

The following schedule shows the composition of rent expense included in
Operating Expenses:

For the Years Ended
December 31,
--------------------------------------------
1996 1995 1994
------------- -------------- -------------
(Thousands of Dollars)

Interest on Capital Lease Obligations................. $ 6,004 $ 6,084 $ 6,156
Amortization of Utility Plant under Capital Leases.... 739 659 588
------------- -------------- -------------
Net minimum lease payments relating to Capital
Leases............................................. 6,743 6,743 6,744
Other Lease payments.................................. 24,801 27,219 28,447
============= ============== =============
Total Rent Expense............................... $31,544 $33,962 $35,191
============= ============== =============

As Lessor

PSRC's net investments in leveraged and direct financing leases are
composed of the following elements:

December 31, 1996 December 31, 1995
----------------------------------- -----------------------------------
(Millions of Dollars) (Millions of Dollars)
Direct Direct
Leveraged Financing Leveraged Financing
Leases Leases Total Leases Leases Total
------------ ------------ --------- ------------- ----------- ---------

Lease rents receivable............ $1,094 $ 35 $1,129 $ 1,031 $ 39 $1,070
Estimated residual value.......... 638 8 646 635 8 643
------------ ------------ --------- ------------- ----------- ---------
1,732 43 1,775 1,666 47 1,713
Unearned and deferred income...... (800) (10) (810) (821) (12) (833)
------------ ------------ --------- ------------- ----------- ---------
Total investments............ 932 33 965 845 35 880
Deferred taxes.................... (530) (10) (540) (405) (11) (416)
============ ============ ========= ============= =========== =========
Net investments.............. $402 $23 $425 $440 $24 $464
============ ============ ========= ============= =========== =========

PSRC's other capital leases are with various regional, state and city
authorities for transportation equipment and aggregated $3 million and $6
million as of December 31, 1996 and 1995, respectively.

Note 13. Commitments and Contingent Liabilities

Nuclear Performance Standard

The BPU has established its NPS for nuclear generating stations owned by
New Jersey electric utilities, including the five nuclear units in which PSE&G
has an ownership interest. Under the NPS, an aggregate capacity factor is
calculated annually using maximum dependable capability of each of the five
nuclear units. This method takes into account actual operating conditions of the
units. Failure to attain a satisfactory capacity factor percentage results in
penalties.

While the NPS does not specifically have a gross negligence provision, the
BPU has indicated that it would consider allegations of gross negligence brought
upon a sufficient factual basis. A finding of gross negligence could result in
penalties other than those prescribed under the NPS. The BPU's December 31, 1996
Order provides that the NPS will not apply to PSE&G for the period January 1,
1996 through December 31, 1998 (see Note 3--Rate Matters).

Nuclear Insurance Coverages and Assessments

PSE&G's insurance coverages and maximum retrospective assessments for its
nuclear operations are as follows:

PSE&G
Maximum
Total Assessments
Site for a Single
Type and Source of Coverages Coverages Incident
- --------------------------------------------------------------- ------------- ------------------
(Millions of Dollars)

Public Liability:
American Nuclear Insurers............................... $ 200.0 N/A
Indemnity(A)............................................ 8,720.3 $210.2
============= ==============
$8,920.3 (B) $210.2
============= ==============
Nuclear Worker Liability:
American Nuclear Insurers(C)............................ $ 200.0 $8.0
============= ==============

Property Damage:
Primary Coverage
American Nuclear Insurers (Peach Bottom)................ $500.0 N/A

Nuclear Mutual Limited (Salem/Hope Creek)............... 500.0 $9.3

Excess Coverage
Nuclear Electric Insurance Ltd. (NEIL II)............... 2,250.0 17.7
------------- --------------
Per Site Total.......................................... $2,750.0 $27.0
============= ==============

Replacement Power:
Nuclear Electric Insurance Ltd. (NEIL I)................ $3.5 (D) $11.5
==== === =====

(A) Retrospective premium program under the Price-Anderson liability
provisions of the Atomic Energy Act of 1954, as amended (Price-Anderson).
Subject to retrospective assessment with respect to loss from an incident
at any licensed nuclear reactor in the United States. This retrospective
assessment can be adjusted for inflation every five years. The last
adjustment was effective as of August 20, 1993.

(B) Limit of liability for each nuclear incident under Price-Anderson.

(C) Industry aggregate limit representing the potential liability from
workers claiming exposure to the hazard of nuclear radiation. This policy
includes automatic reinstatements up to an aggregate of $200 million,
thereby providing total coverage of $400 million. This policy is not
subject to retrospective assessments under the Price-Anderson Act.

(D) Represents limit of coverage available to co-owners of Salem and Hope
Creek, for each plant. Each co-owner purchases its own policy. PSE&G is
currently covered for its percent ownership interest in each plant for
this limit.

Price-Anderson sets the "limit of liability" for claims that could arise
from an incident involving any licensed nuclear facility in the nation. The
"limit of liability" is based on the number of licensed nuclear reactors and is
adjusted at least every five years based on the Consumer Price Index. The
current "limit of liability" is $8.9 billion. All utilities owning a nuclear
reactor, including PSE&G, have provided for this exposure through a combination
of private insurance and mandatory participation in a financial protection pool
as established by Price-Anderson. Under Price-Anderson, each party with an
ownership interest in a nuclear reactor can be assessed its share of $79.3
million per reactor per incident, payable at $10 million per reactor per
incident per year. If the damages exceed the "limit of liability", the President
is to submit to Congress a plan for providing additional compensation to the
injured parties. Congress could impose further revenue raising measures on the
nuclear industry to pay claims. PSE&G's maximum aggregate assessment per
incident is $210.2 million (based on PSE&G's ownership interests in Hope Creek,
Peach Bottom and Salem) and its maximum aggregate annual assessment per incident
is $26.5 million.

Further, a recent decision by the U.S. Court of Appeals for the Third
Circuit, not involving PSE&G, held that the Price Anderson Act did not preclude
awards based on state law claims for punitive damage.

PSE&G is a member of two industry mutual insurance companies; Nuclear
Mutual Limited (NML), and Nuclear Electric Insurance Limited (NEIL). NML
provides the primary property insurance at Salem and Hope Creek. NEIL provides
excess property insurance through its NEIL II policy and replacement power
coverage through its NEIL I policy. Both companies may make retrospective
premium assessments in case of adverse loss experience. PSE&G's maximum
potential liabilities under these assessments are included in the table and
notes above. Certain of the policies also provide that the insurer may suspend
coverage with respect to all nuclear units on a site without notice if the NRC
suspends or revokes the operating license for any unit on a site, issues a
shutdown order with respect to such unit or issues a confirmatory order keeping
such unit down. While the NRC has issued confirmatory action letters with
respect to the Salem shutdown, PSE&G does not expect any action to be taken by
any insurer as a result of these NRC letters.

Construction and Fuel Supplies

PSE&G has substantial commitments as part of its ongoing construction
program which include capital requirements for nuclear fuel. PSE&G's
construction program is continuously reviewed and periodically revised as a
result of changes in economic conditions, revised load forecasts, scheduled
retirement dates of existing facilities, business strategies, site changes, cost
escalations under construction contracts, requirements of regulatory authorities
and laws, the timing of and amount of electric and gas rate changes and the
ability of PSE&G to raise necessary capital. Pursuant to an electric integrated
resource plan (IRP), PSE&G periodically reevaluates its forecasts of future
customers, load and peak growth, sources of electric generating capacity and
demand side management (DSM) to meet such projected growth, including the need
to construct new electric generating capacity. The IRP takes into account
assumptions concerning future demands of customers, effectiveness of
conservation and load management activities, the long-term condition of PSE&G's
plants, capacity available from electric utilities and other suppliers and the
amounts of co-generation and other non-utility capacity projected to be
available.

PSE&G's construction expenditures are expected to aggregate approximately
$2.6 billion during the years 1997 through 2001, which includes $433 million for
nuclear fuel and $96 million of AFDC. The estimate of construction requirements
is based on expected project completion dates and includes anticipated
escalation due to inflation of approximately 3% annually. Therefore,
construction delays or higher inflation levels could cause significant increases
in these amounts. PSE&G expects to internally generate the funds necessary to
satisfy its construction expenditures over this period, assuming adequate and
timely recovery of costs, as to which no assurances can be given. In addition,
PSE&G does not presently anticipate any difficulties in obtaining sufficient
sources of fuel for electric generation or adequate gas supplies during the
years 1997 through 2001.

Hazardous Waste

Certain Federal and State laws authorize the U.S. Environmental Protection
Agency (EPA) and the New Jersey Department of Environmental Protection (NJDEP),
among other agencies, to issue orders and bring enforcement actions to compel
responsible parties to investigate and take remedial actions at any site that is
determined to present an imminent and substantial danger to the public or the
environment because of an actual or threatened release of one or more hazardous
substances. Because of the nature of PSE&G's business, including the production
of electricity, the distribution of gas and, formerly, the manufacture of gas,
various by-products and substances are or were produced or handled which contain
constituents classified as hazardous. PSE&G generally provides for the disposal
or processing of such substances through licensed independent contractors.
However, these statutory provisions impose joint and several responsibility
without regard to fault on all responsible parties, including the generators of
the hazardous substances, for certain investigative and remediation costs at
sites where these substances were disposed of or processed. PSE&G has been
notified with respect to a number of such sites and the remediation of these
potentially hazardous sites is receiving greater attention from the government
agencies involved. Generally, actions directed at funding such site
investigations and remediation include all suspected or known responsible
parties. Except as discussed below with respect to its manufactured Gas Plan
Remediation Program (Remediation Program), PSE&G does not expect its
expenditures for any such site to have a material effect on its financial
position, results of operations or net cash flows.

PSE&G Manufactured Gas Plant Remediation Program

In 1988, NJDEP notified PSE&G that it had identified the need for PSE&G,
pursuant to a formal arrangement, to systematically investigate and, if
necessary, resolve environmental concerns extant at PSE&G's former manufactured
gas plant sites. To date, NJDEP and PSE&G have identified 38 former gas plant
sites. PSE&G is currently working with NJDEP under a program to assess,
investigate and, if necessary, remediate environmental concerns at these sites.
The Remediation Program is periodically reviewed and revised by PSE&G based on
regulatory requirements, experience with the Remediation Program and available
technologies. The cost of the Remediation Program cannot be reasonably
estimated, but experience to date indicates that costs of at least $20 million
per year could be incurred over a period of more than 30 years and that the
overall cost could be material to PSE&G's financial position, results of
operations or net cash flows.

Costs incurred through December 31, 1996 for the Remediation Program
amounted to $81.2 million, net of certain insurance proceeds. In addition, at
December 31, 1996, PSE&G's estimated liability for remediation costs through
1999 aggregate $86 million.

Note 14. Postretirement Benefits Other Than Pensions

In 1993, Enterprise and PSE&G adopted SFAS 106 which requires that the
expected cost of employees' postretirement health care and life insurance
benefits be charged to expense during the years in which employees render
service. PSE&G elected to amortize, over 20 years, its unfunded obligation of
$609.3 million at January 1, 1993. The following table discloses the significant
components of the net periodic postretirement benefit obligation:

NET PERIODIC POSTRETIREMENT BENEFIT OBLIGATION December 31,
---------------------------------------
1996 1995 1994
---------- ------------- -------------
(Millions of Dollars)

Service cost........................................... $10.4 $ 8.5 $11.1
Interest on accumulated postretirement obligation...... 51.2 48.2 45.4
Amortization of transition obligation.................. 30.5 30.5 30.5
Amortization of Net (Gain)/Loss (A).................... (1.0) (3.8) --
Deferral of current expense............................ (59.0) (50.7) (57.8)
---------- ------------- -------------
Annual net expense............................. $32.1 $32.7 $29.2
========== ============= =============

(A) Reflects change in Plan Assumptions.

The discount rate used in determining the PSE&G net periodic postretirement
benefit cost was 8.0% and 8.5% for 1996 and 1995, respectively.

A one percentage-point increase in the assumed health care cost trend rate
for each year would increase the aggregate of the service and interest cost
components of net periodic postretirement health care cost by approximately $5.2
million, or 10.0%, and increase the accumulated postretirement benefit
obligation as of December 31, 1996 by $51.4 million, or 8.3%.

The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation in 1996 were: medical costs for pre-age
sixty-five retirees--12.5%, medical costs for post-age sixty-five retirees--8.5%
and dental costs--6.5%; such rates are assumed to gradually decline to 5% each
in 2011. The medical costs above include a provision for prescription drugs.

In its most recent base rate case, PSE&G requested full recovery of the
costs associated with postretirement benefits other than pensions (OPEB) on an
accrual basis, in accordance with SFAS 106. The BPU's base rate order provided
that (1) PSE&G's pay-as-you-go basis OPEB costs will continue to be included in
cost of service and will be recoverable in base rates on a pay-as-you-go basis;
(2) prudently incurred OPEB costs, that are accounted for on an accrual basis in
accordance with SFAS 106, will be recoverable in future rates; (3) PSE&G should
account for the differences between its OPEB costs on an accrual basis and the
pay-as-you-go basis being recovered in rates as a regulatory asset; and (4) the
issue of cash versus accrual accounting will be revisited and in the event that
FASB or the SEC requires the use of accrual accounting for OPEB costs for
rate-making purposes, the regulatory asset will be recoverable, through rates,
over an appropriate amortization period.

Accordingly, PSE&G is accounting for the differences between its SFAS 106
accrual cost and the cash cost currently recovered through rates as a regulatory
asset. OPEB costs charged to expense during 1996 were $32.1 million and accrued
OPEB costs deferred were $59.0 million. The amount of the unfunded liability, at
December 31, 1996, as shown below, is $734.5 million and funding options are
currently being explored. The primary effect of adopting SFAS 106 on
Enterprise's and PSE&G's financial reporting was on the presentation of their
financial positions with minimal effect on their results of operations.

In 1993, the FASB's Emerging Issues Task Force (EITF) concluded that
deferral of such costs is acceptable, provided regulators allow SFAS 106 costs
in rates within approximately five years of the adoption of SFAS 106 for
financial reporting purposes, with any cost deferrals recovered in approximately
twenty years. In accordance with the BPU's January 8, 1997 Order regarding SFAS
106 cost recovery mechanisms, PSE&G expects full SFAS 106 recovery and believes
that it is probable that current and deferred costs as of December 31, 1996 will
be recovered from utility customers within such twenty-year time period. As of
December 31, 1996, PSE&G had deferred $226.2 million of such costs.

In accordance with SFAS 106 disclosure requirements, a reconciliation of
the funded status of the plan is as follows:

ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION December 31,
--------------------------
1996 1995
------------ ------------
(Millions of Dollars)
Retirees....................................... $(493.0) $(444.6)
Fully eligible active plan participants........ (35.9) (52.9)
Other active plan participants................. (205.6) (220.4)
------------ ------------
Total..................................... (734.5) (717.9)
Plan assets at fair value...................... -- --
------------ ------------
Accumulated postretirement benefit
obligation in excess of plan assets......... (734.5) (717.9)
Unrecognized net (gain)/loss from past
experience different from that assumed
and from changes in assumptions.............. 14.9 32.8
Unrecognized prior service cost................ 33.9 --
Unrecognized transition obligation............. 459.5 517.9
============ ============
Accrued postretirement obligation.............. $(226.2) $(167.2)
============ ============

The discount rate used in determining the accumulated postretirement
benefit obligation was 7.50% and 7.25% for 1996 and 1995, respectively.

Note 15. Pension Plan

The discount rates, expected long-term rates of return on assets and
average compensation growth rates used in determining the Pension Plan's funded
status and net pension cost as of December 31, 1996 and 1995 were as follows:

1996 1995
------- -------
Funded Status:
Discount Rate used to Determine Benefit
Obligations........................................ 7.50% 7.25%
Average Compensation Growth to Determine
Benefit Obligations................................ 4.50% 4.50%
Net Pension Cost:
Discount Rate........................................ 8.00% 8.50%
Expected Long-Term Return on Assets.................. 8.50% 8.50%
Average Compensation Growth.......................... 4.50% 4.50%

The following table shows the Pension Plan's funded status:

December 31,
----------------------------------
1996 1995
--------------- -----------------
(Thousands of Dollars)

Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of $1,474,074
in 1996 and $1,403,313 in 1995................................................ $(1,571,807) $(1,509,841)
Effect of projected future compensation.......................................... (459,251) (321,545)
--------------- -----------------
Projected benefit obligations.................................................... (2,031,058) (1,831,386)
Plan assets at fair value, primarily listed equity and debt securities........... 1,686,532 1,533,446
--------------- -----------------
Projected benefit obligations in excess of plan assets........................... (344,526) (297,940)
Unrecognized net gain (loss) from past experience and effects of changes in
assumptions................................................................... 151,440 120,859
Prior service cost not yet recognized in net pension cost........................ 130,664 110,213
Unrecognized net obligations being recognized over 16.7 years.................... 53,187 61,287
Additional minimum liability for Cash Balance Plan............................... (115) --
--------------- -----------------
Accrued pension expense.......................................................... $(9,350) $(5,581)
=============== =================

The net pension cost for the years ended December 31, 1996, 1995 and 1994,
include the following components:

1996 1995 1994
---------------- ---------------- ------------------
(Thousands of Dollars)

Service cost--benefits earned during year.................... $ 50,610 $ 37,033 $ 42,904
Interest cost on projected benefit obligations............... 136,333 124,147 108,394
Return on assets............................................. (131,728) (312,190) 5,022
SFAS 88 early retirement (A)................................. 1,800 -- --
Net amortization and deferral................................ 18,639 222,916 (90,752)
================ ================ ==================
Total................................................... $ 75,654 $ 71,906 $ 65,568
================ ================ ==================

See Note 1--Organization and Summary of Significant Accounting Policies.

(A) Effective May 1, 1996, PSE&G's Pension Plan was amended allowing employees
the option to retire early upon attainment of age 55 and completion of 25
or more years of service. Also, between May 1, 1996 and April 30, 1997,
early retirement without reduction is available to employees who have
attained age 50 and have completed 30 or more years of service. The
accounting statement that establishes the standards for this is Statement
of Financial Accounting Standard No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" (SFAS 88). SFAS 88 requires that an employer that
offers special termination benefits to employees shall recognize a
liability when the employees accept the offer and the amount can be
reasonably estimated. This results in an immediate expense applicable to
the employees who, as of December 31, 1996, have accepted the offer.

Note 16. Financial Information by Business Segments

Information related to the segments of Enterprise's business is detailed
below:

Non-utility
Electric Gas Activities (A) Total
--------------- -------------- ---------------- ----------------
(Thousands of Dollars)

For the Year Ended December 31, 1996
Total Operating Revenues......................... $3,944,362 $1,880,994 $215,893 $6,041,249
--------------- -------------- ---------------- ----------------
Depreciation and Amortization.................... 516,968 87,277 3,048 607,293
Operating Income Before Income Taxes............. 977,545 234,215 140,136 1,351,896
Capital Expenditures............................. 463,263 139,520 46,829 649,6120
December 31, 1996
Net Utility Plant................................ 9,565,698 1,613,455 -- 11,179,153
Other Corporate Assets........................... 2,839,894 780,307 2,115,977 5,736,178
=============== ============== ================ ================
Total Assets..................................... $12,405,592 $2,393,762 $2,115,977 $16,915,331
=============== ============== ================ ================
For the Year Ended December 31, 1995
Total Operating Revenues......................... $4,020,842 $1,686,403 $186,417 $5,893,662
--------------- -------------- ---------------- ----------------
Depreciation and Amortization.................... 503,022 88,092 5,852 596,966
Operating Income Before Income Taxes............. 1,140,279 178,718 121,362 1,440,359
Capital Expenditures............................. 545,997 140,153 139,538 825,688
December 31, 1995
Net Utility Plant................................ 9,651,695 1,535,736 -- 11,187,431
Other Corporate Assets........................... 2,730,245 669,289 2,229,526 5,629,060
=============== ============== ================ ================
Total Assets..................................... $12,381,940 $2,205,025 $2,229,526 $16,816,491
=============== ============== ================ ================
For the Year Ended December 31, 1994
Total Operating Revenues......................... $3,739,713 $1,778,528 $ 177,082 $ 5,695,323
--------------- -------------- ---------------- ----------------
Depreciation and Amortization.................... 471,910 79,462 4,089 555,461
Operating Income Before Income Taxes............. 1,083,155 226,196 129,366 1,438,717
Capital Expenditures............................. 734,100 153,183 142,501 1,029,784
December 31, 1994
Net Utility Plant................................ 9,642,177 1,456,068 -- 11,098,245
Other Corporate Assets........................... 2,586,847 574,306 2,053,336 5,214,489
=============== ============== ================ ================
Total Assets..................................... $12,229,024 $2,030,374 $2,053,336 $ 16,312,734
=============== ============== ================ ================

(A) The Non-utility Activities include amounts applicable to Enterprise, the
parent corporation.

Information related to Property, Plant and Equipment of PSE&G is detailed
below:

December 31,
------------------------------------------------------
1996 1995 1994
---------------- ----------------- ----------------
(Thousands of Dollars)

Utility Plant--Original Cost
Electric Plant in Service
Steam Production........................ $ 1,843,257 $ 1,791,010 $ 1,810,674
Nuclear Production...................... 6,000,860 5,992,341 5,931,049
Transmission 1,145,760 1,127,031 1,078,928
Distribution............................ 3,170,851 3,044,830 2,877,862
Other................................... 1,153,305 1,139,891 647,406
---------------- ----------------- ----------------
Total Electric Plant in Service.... 13,314,033 13,095,103 12,345,919
---------------- ----------------- ----------------
Gas Plant in Service
Transmission 67,218 65,109 62,213
Distribution 2,357,584 2,250,705 2,131,816
Other................................... 131,099 126,758 124,204
---------------- ----------------- ----------------
Total Gas Plant in Service......... 2,555,901 2,442,572 2,318,233
---------------- ----------------- ----------------
Common Plant in Service
Capital Leases.......................... 58,610 58,610 58,610
General................................. 471,575 458,494 486,521
---------------- ----------------- ----------------
Total Common Plant in Service...... 530,185 517,104 545,131
Total......................... $16,400,119 $16,054,779 $15,209,283
================ ================= ================

Note 17. Jointly Owned Facilities--Utility Plant

PSE&G has ownership interests in and is responsible for providing its share
of the necessary financing for the following jointly owned facilities. All
amounts reflect the share of PSE&G's jointly owned projects and the
corresponding direct expenses are included in Consolidated Statements of Income
as operating expenses. (See Note 1--Organization and Summary of Significant
Accounting Policies.)

Plant--December 31, 1996
-------------------------------------------------------------------------
Ownership Plant in Accumulated Plant Under
Interest Service Depreciation Construction
--------------- --------------- ------------------ ------------------
(Thousands of Dollars)

Coal Generating
Conemaugh.................... 22.50% $203,436 $45,353 $1,104
Keystone..................... 22.84% 123,525 36,789 1,349
Nuclear Generating
Peach Bottom................. 42.49% 767,410 337,481 28,822
Salem........................ 42.59% 1,052,143 394,752 136,019
Hope Creek................... 95.00% 4,127,669 1,189,222 15,045
Nuclear Support Facilities... Various 186,685 39,958 2,788
Pumped Storage Generating
Yards Creek.................. 50.00% 27,628 9,955 3,750
Transmission Facilities........... Various 122,264 38,847 818
Merrill Creek Reservoir........... 13.91% 37,241 13,731 --
Linden Gas Plant.................. 90.00% 15,853 20,495 --

Note 18. Selected Quarterly Data (Unaudited)

The information shown below, in the opinion of Enterprise, includes all
adjustments, consisting only of normal recurring accruals, necessary to a fair
presentation of such amounts. Due to the seasonal nature of the utility
business, quarterly amounts vary significantly during the year.

Calendar Quarter Ended
-------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------------ ------------------------- ----------------------- ---------------------
1996 1995 1996 1995 1996 1995 1996 1995
------------ ----------- ------------- ----------- ----------- ----------- ---------- ----------
(Thousands where Applicable)

Operating Revenues.........$1,797,245 $1,629,792 $1,335,892 $1,274,410 $1,333,957 $1,432,848 $1,574,155 $1,556,612
Operating Income........... 307,387 326,499 235,029 225,645 263,023 307,337 251,520 235,709
Net Income................. 194,104 212,592 134,538 110,667 155,833 186,782 127,121 152,282
Earnings Per Share of
Common Stock............. 0.79 0.87 0.55 0.45 0.64 0.76 0.54 0.63
Average Shares of Common
Stock Outstanding........ 244,698 244,698 244,698 244,698 243,114 244,698 237,143 244,698

See Note 2--Discontinued Operations of Notes.

PSE&G

Except as modified below, the Notes to Consolidated Financial Statements of
Enterprise are incorporated herein by reference insofar as they relate to PSE&G
and its subsidiaries:

Note 1. -- Organization and Summary of Significant Accounting Policies
Note 2. -- Discontinued Operations
Note 3. -- Rate Matters
Note 4. -- PSE&G Nuclear Decommissioning
Note 5. -- Schedule of Consolidated Capital Stock and Other Securities
Note 6. -- Deferred Items
Note 7. -- Schedule of Consolidated Debt
Note 8. -- Long-Term Investments
Note 9. -- Financial Instruments and Risk Management
Note 12. -- Leasing Activities--As Lessee
Note 13. -- Commitments and Contingent Liabilities
Note 14. -- Postretirement Benefits Other Than Pensions
Note 15. -- Pension Plan
Note 16. -- Financial Information by Business Segments
Note 17. -- Jointly Owned Facilities--Utility Plant

Note 1. Organization and Summary of Significant Accounting Policies

Consolidation Policy

The consolidated financial statements include the accounts of PSE&G and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications of prior years' data have
been made to conform with the current presentation.

Enterprise owns all of PSE&G's common stock (without nominal or par value).
Of the 150,000,000 authorized shares of such common stock at December 31, 1996,
1995 and 1994, there were 132,450,344 shares outstanding, with an aggregate book
value of $2.6 billion.

Note 10. Cash and Cash Equivalents

The December 31, 1996 and 1995 balances consist primarily of working funds.

Note 11. Federal Income Taxes

A reconciliation of reported Net Income with pretax income and of Federal
income tax expense with the amount computed by multiplying pretax income by the
statutory Federal income tax rate of 35% is as follows:

1996 1995 1994
------------- ------------- -------------
(Thousands of Dollars)

Net Income...................................................... $535,071 $616,964 $659,406
------------- ------------- -------------
Federal income taxes:
Operating income:
Current provision.......................................... 240,852 275,460 230,709
Provision for deferred income taxes--net(A)................. 43,497 65,084 83,028
Investment tax credits--net................................. (18,973) (19,111) (19,208)
------------- ------------- -------------
Total included in operating income......................... 265,376 321,433 294,529
Miscellaneous other income:
Current provision.......................................... 537 (9,897) (8,186)
Provision for deferred income taxes(A)..................... 21 9,816 10,422
SFAS 90 deferred income taxes(A)........................... 1,781 2,161 2,530
------------- ------------- -------------
Total Federal income tax provisions................... 267,715 323,513 299,295
============= ============= =============
Pretax income................................................... $802,786 $940,477 $958,701
============= ============= =============

Reconciliation between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:

1996 1995 1994
------------- ------------- -------------
(Thousands of Dollars)

Tax computed at the statutory rate............................... $280,975 $329,167 $335,546
------------- ------------- -------------
Increase (decrease) attributable to flow through of
certain tax adjustments:
Depreciation................................................ 11,031 16,257 (4,597)
Amortization of investment tax credits...................... (18,973) (19,111) (19,208)
Other....................................................... (5,318) (2,800) (12,446)
------------- ------------- -------------
Subtotal............................................... (13,260) (5,654) (36,251)
------------- ------------- -------------
Total Federal income tax provisions.................... $267,715 $323,513 $299,295
============= ============= =============
Effective Federal income tax rate................................ 33.3% 34.4% 31.2%

(A) The provision for deferred income taxes represents the tax effects of the
following items:

1996 1995 1994
------------- -------------- -------------
(Thousands of Dollars)

Deferred Credits:
Additional tax depreciation and amortization................ $30,907 $111,193 $85,335
Property Abandonments....................................... (6,985) (7,411) (6,606)
Oil and Gas Property Write-Down............................. (2,451) (2,451) (2,451)
Deferred Fuel Costs--net..................................... 6,533 (3,601) 39,361
Other....................................................... 17,295 (20,669) (19,659)
============= ============== =============
Total.................................................. $45,299 $77,061 $95,980
============= ============== =============

SFAS 109

The following is an analysis of deferred income taxes:

December 31,
-------------------------------
1996 1995
------------- --------------

Deferred Income Taxes (Thousands of Dollars)
Assets:
Current (net)........................................... $23,210 $27,571
Noncurrent:
Unrecovered Investment Tax Credits.................... 123,073 129,713
Nuclear Decommissioning............................... 27,156 25,241
Construction Period Interest and Taxes................ 16,292 17,199
Vacation Pay.......................................... 6,796 6,681
Other................................................. 16,862 5,057
------------- --------------
Total Noncurrent................................... 190,179 183,891
------------- --------------
Total Assets....................................... 213,389 211,462
------------- --------------
Liabilities:
Noncurrent:
Plant Related Items................................... 2,255,650 2,237,386
Property Abandonments................................. 16,281 21,469
Oil and Gas Property Write-Down....................... 11,196 13,061
Deferred Electric Energy & Gas Costs.................. 62,817 56,283
Unamortized Debt Expense.............................. 39,980 36,945
Taxes Recoverable Through Future Rates (Net).......... 258,740 262,625
Other................................................. 103,102 91,725
------------- --------------
Total Noncurrent................................... 2,747,766 2,719,494
------------- --------------
Total Liabilities.................................. 2,747,766 2,719,494
------------- --------------
Summary--Deferred Income Taxes
Net Current Assets...................................... 23,210 27,571
Net Deferred Liability.................................. 2,557,587 2,535,603
============= ==============
Total.............................................. $2,534,377 $2,508,032
============= ==============

The balance of Federal income tax (receivable from) payable by PSE&G to
Enterprise was $(4.9) million and $5.3 million, as of December 31, 1996 and
December 31, 1995, respectively.

Note 18. Selected Quarterly Data (Unaudited)

The information shown below, in the opinion of PSE&G, includes all
adjustments, consisting only of normal recurring accruals, necessary to a fair
presentation of such amounts. Due to the seasonal nature of the utility
business, quarterly amounts vary significantly during the year.

Calendar Quarter Ended March 31, June 30, September 30, December 31,
----------------------
------------------------ ------------------------ ----------------------- -----------------------
1996 1995 1996 1995 1996 1995 1996 1995
----------- ------------ ----------- ----------- ----------- ----------- ----------- -----------
(Thousands of Dollars)

Operating Revenues........ $1,755,249 $1,579,516 $1,285,637 $1,235,435 $1,269,447 $1,381,004 $1,515,023 $1,511,290
Operating Income.......... 285,102 298,432 209,095 204,606 227,965 280,525 224,319 211,939
Net....................... 183,650 206,896 108,767 111,300 121,739 184,878 120,915 113,890
Income Earnings Available
to Enterprise............ $176,124 $198,214 $119,797 $102,620 $117,654 $176,196 $116,512 $105,698

Note 19. Accounts Receivable (Accounts Payable) from (to)
Associated Companies--Net

The balance at December 31, 1996 and 1995 consisted of the following:

1996 1995
--------------- ---------------
(Thousands of Dollars)

Public Service Enterprise Group Incorporated (A)........ $1,540 $(9,055)
Enterprise Diversified Holdings Incorporated............ 2,758 1,145
Other................................................... 10 (101)
=============== ===============
Total......................................... $4,308 $(8,011)
=============== ===============

(A) Principally Federal income taxes related to PSE&G's taxable income.

FINANCIAL STATEMENT RESPONSIBILITY--ENTERPRISE

Management of Enterprise is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and related notes of
Enterprise. The consolidated financial statements and related notes are prepared
in accordance with generally accepted accounting principles. The financial
statements reflect estimates based upon the judgment of management where
appropriate. Management believes that the consolidated financial statements and
related notes present fairly Enterprise's financial position and results of
operations. Information in other parts of this Annual Report is also the
responsibility of management and is consistent with these consolidated financial
statements and related notes.

The firm of Deloitte & Touche LLP, independent auditors, is engaged to
audit Enterprise's consolidated financial statements and related notes and issue
a report thereon. Deloitte & Touche's audit is conducted in accordance with
generally accepted auditing standards. Management has made available to Deloitte
& Touche all the corporation's financial records and related data, as well as
the minutes of directors' meetings. Furthermore, management believes that all
representations made to Deloitte & Touche during its audit were valid and
appropriate.

Management has established and maintains a system of internal accounting
controls to provide reasonable assurance that assets are safeguarded, and that
transactions are executed in accordance with management's authorization and
recorded properly for the prevention and detection of fraudulent financial
reporting, so as to maintain the integrity and reliability of the financial
statements. The system is designed to permit preparation of consolidated
financial statements and related notes in accordance with generally accepted
accounting principles. The concept of reasonable assurance recognizes that the
costs of a system of internal accounting controls should not exceed the related
benefits. Management believes the effectiveness of this system is enhanced by an
ongoing program of continuous and selective training of employees. In addition,
management has communicated to all employees its policies on business conduct,
safeguarding assets and internal controls.

The Internal Auditing Department of PSE&G conducts audits and appraisals of
accounting and other operations of Enterprise and its subsidiaries and evaluates
the effectiveness of cost and other controls and, where appropriate, recommends
to management improvements thereto. Management has considered the internal
auditors' and Deloitte & Touche's recommendations concerning the corporation's
system of internal accounting controls and has taken actions that, in its
opinion, are cost-effective in the circumstances to respond appropriately to
these recommendations. Management believes that, as of December 31, 1996, the
corporation's system of internal accounting controls is adequate to accomplish
the objectives discussed herein.

The Board of Directors of Enterprise carries out its responsibility of
financial overview through its Audit Committee, which presently consists of six
directors who are not employees of Enterprise or any of its affiliates. The
Audit Committee meets periodically with management as well as with
representatives of the internal auditors and Deloitte & Touche. The Audit
Committee reviews the work of each to ensure that its respective
responsibilities are being carried out and discusses related matters. Both the
internal auditors and Deloitte & Touche periodically meet alone with the Audit
Committee and have free access to the Audit Committee, and its individual
members, at all times.

E. JAMES FERLAND ROBERT C. MURRAY
Chairman of the Board, Vice President and
President and Chief Executive Officer Chief Financial Officer

PATRICIA A. RADO
Vice President and Controller
Principal Accounting Officer

February 14, 1997

FINANCIAL STATEMENT RESPONSIBILITY--PSE&G

Management of PSE&G is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and related notes of PSE&G.
The consolidated financial statements and related notes are prepared in
accordance with generally accepted accounting principles. The financial
statements reflect estimates based upon the judgment of management where
appropriate. Management believes that the consolidated financial statements and
related notes present fairly PSE&G's financial position and results of
operations. Information in other parts of this Annual Report is also the
responsibility of management and is consistent with these consolidated financial
statements and related notes.

The firm of Deloitte & Touche LLP, independent auditors, is engaged to
audit PSE&G's consolidated financial statements and related notes and issue a
report thereon. Deloitte & Touche's audit is conducted in accordance with
generally accepted auditing standards. Management has made available to Deloitte
& Touche all the corporation's financial records and related data, as well as
the minutes of directors' meetings. Furthermore, management believes that all
representations made to Deloitte & Touche during its audit were valid and
appropriate.

Management has established and maintains a system of internal accounting
controls to provide reasonable assurance that assets are safeguarded, and that
transactions are executed in accordance with management's authorization and
recorded properly for the prevention and detection of fraudulent financial
reporting, so as to maintain the integrity and reliability of the financial
statements. The system is designed to permit preparation of consolidated
financial statements and related notes in accordance with generally accepted
accounting principles. The concept of reasonable assurance recognizes that the
costs of a system of internal accounting controls should not exceed the related
benefits. Management believes the effectiveness of this system is enhanced by an
ongoing program of continuous and selective training of employees. In addition,
management has communicated to all employees its policies on business conduct,
safeguarding assets and internal controls.

The Internal Auditing Department conducts audits and appraisals of
accounting and other operations and evaluates the effectiveness of cost and
other controls and, where appropriate, recommends to management improvements
thereto. Management has considered the internal auditors' and Deloitte &
Touche's recommendations concerning the corporation's system of internal
accounting controls and has taken actions that are cost-effective in the
circumstances to respond appropriately to these recommendations. Management
believes that, as of December 31, 1996, the corporation's system of internal
accounting controls is adequate to accomplish the objectives discussed herein.

The Board of Directors carries out its responsibility of financial overview
through the Audit Committee of Enterprise, which presently consists of six
directors who are not employees of PSE&G or any of its affiliates. The
Enterprise Audit Committee meets periodically with management as well as with
representatives of the internal auditors and Deloitte & Touche. The Audit
Committee reviews the work of each to ensure that their respective
responsibilities are being carried out and discusses related matters. Both the
internal auditors and Deloitte & Touche, periodically meet alone with the Audit
Committee and have free access to the Audit Committee, and its individual
members, at all times.

E. JAMES FERLAND ROBERT C. MURRAY
Chairman of the Board, Vice President and
President and Chief Executive Officer Chief Financial Officer

PATRICIA A. RADO
Vice President and Controller
Principal Accounting Officer

February 14, 1997

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of
Public Service Enterprise Group Incorporated:

We have audited the consolidated balance sheets of Public Service
Enterprise Group Incorporated and its subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of income,
retained earnings, and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the consolidated financial
statement schedule listed in the Index in Item 14(b)(1). These consolidated
financial statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and consolidated financial
statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Public Service Enterprise Group
Incorporated and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of December 31, 1994,
1993, and 1992, and the related consolidated statements of income, retained
earnings and cash flows for the years ended December 31, 1993 and 1992 (none of
which are presented herein) and we expressed unqualified opinions on those
consolidated financial statements. In our opinion, the information set forth in
the Selected Financial Data for each of the five years in the period ended
December 31, 1996 for the Company, presented in Item 6, is fairly stated in all
material respects, in relation to the consolidated financial statements from
which it has been derived.

DELOITTE & TOUCHE LLP

February 14, 1997
Parsippany, New Jersey

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Public Service Electric and Gas Company:

We have audited the consolidated balance sheets of Public Service Electric
and Gas Company and its subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, retained earnings, and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the consolidated financial statement schedule listed in
the Index in Item 14(b)(2). These consolidated financial statements and the
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Public Service Electric and Gas
Company and its subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of December 31, 1994,
1993, and 1992, and the related consolidated statements of income, retained
earnings and cash flows for the years ended December 31, 1993 and 1992 (none of
which are presented herein) and we expressed unqualified opinions on those
consolidated financial statements. In our opinion, the information set forth in
the Selected Financial Data for each of the five years in the period ended
December 31, 1996 for the Company, presented in Item 6, is fairly stated in all
material respects, in relation to the consolidated financial statements from
which it has been derived.

DELOITTE & TOUCHE LLP

February 14, 1997
Parsippany, New Jersey

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Enterprise and PSE&G, none.

PART III

Item 10. Directors and Executive Officers of the Registrants

Directors of the Registrants

Enterprise

The information required by Item 10 of Form 10-K with respect to present
directors who are nominees for election as directors at Enterprise's Annual
Meeting of Stockholders to be held on April 15, 1997, and directors whose terms
will continue beyond the meeting, is set forth under the heading "Election of
Directors" in Enterprise's definitive Proxy Statement for such Annual Meeting of
Stockholders, which definitive Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about March 1, 1997 and which
information set forth under said heading is incorporated herein by this
reference thereto.

PSE&G

There is shown as to each present director information as to the period of
service as a director of PSE&G, age as of April 15, 1997, present committee
memberships, business experience during the last five years and other present
directorships. For discussion of certain litigation involving the directors of
PSE&G, except Forrest J. Remick, see Part I--Business, Item 3--Legal
Proceedings.

LAWRENCE R. CODEY has been a director since 1988. Age 52. Member of
Executive Committee. Has been President and Chief Operating Officer of PSE&G
since 1991. Director of Enterprise. Director of Sealed Air Corporation, The
Trust Company of New Jersey, United Water Resources Inc. and Blue Cross & Blue
Shield of New Jersey.

E. JAMES FERLAND has been a director since 1986. Age 55. Chairman of
Executive Committee. Chairman of the Board, President and Chief Executive
Officer of Enterprise since July 1986, Chairman of the Board and Chief Executive
Officer of PSE&G since September 1991 and Chairman of the Board and Chief
Executive Officer of EDHI since June 1989. Director of Enterprise and of EDHI
and its principal subsidiaries. Director of Foster Wheeler Corporation and The
Hartford Steam Boiler Inspection and Insurance Company.

RAYMOND V. GILMARTIN has been a director since 1993. Age 56. Director of
Enterprise. Has been Chairman of the Board, President and Chief Executive
Officer of Merck & Co., Inc., Whitehouse Station, New Jersey (discovers,
develops, produces and markets human and animal health products) since November
1994. Was President and Chief Executive Officer from June 1994 to November 1994.
Was Chairman of the Board, President and Chief Executive Officer of Becton
Dickinson and Company from November 1992 to June 1994 and President and Chief
Executive Officer from February 1989 to November 1992. Director of Merck & Co.,
Inc. and Providian Corporation.

IRWIN LERNER has been a director since 1993. Age 66. Was previously a
director from 1981 to February 1988. Director of Enterprise. Was Chairman, Board
of Directors from January 1993 to September 1993 and President and Chief
Executive Officer from 1980 to December 1992 of Hoffmann-La Roche Inc., Nutley,
New Jersey (prescription pharmaceuticals, vitamins and fine chemicals, and
diagnostic products and services). Director of Humana Inc., Sequana
Therapeutics, Inc. and Medarex, Inc.

JAMES C. PITNEY has been a director since 1993. Age 70. Was previously a
director from 1979 to February 1988. Member of Executive Committee. Director of
Enterprise. Has been a partner in the law firm of Pitney, Hardin, Kipp & Szuch,
Morristown, New Jersey, since 1958. Director of Tri-Continental Corporation,
sixteen funds of the Seligman family of funds and Seligman Quality, Inc. Mr.
Pitney will retire as a Director at the expiration of his term at the 1997
Annual Meeting of Stockholders.

FORREST J. REMICK has been a director since 1995. Age 66. Director of
Enterprise. Has been an engineering consultant since 1994. Was Commissioner,
U.S. Nuclear Regulatory Commission, from December 1989 to June 1994. Was
Associate Vice President--Research and Professor of Nuclear Engineering at
Pennsylvania State University, from 1985 to 1989.

Executive Officers of the Registrants

The following table sets forth certain information concerning the executive
officers of Enterprise and PSE&G, respectively.

Age Effective Date
Name December 31, 1996 Office First Elected to Present
Position
- ----------------------------- --------------------- -----------------------------------------------------------------------

E. James Ferland............ 54 Chairman of the Board, President July 1986 to present
and Chief Executive Officer
(Enterprise)

Chairman of the Board and Chief July 1986 to present
Executive Officer (PSE&G)

President (PSE&G) June 1986 to September 1991

Chairman of the Board and Chief June 1989 to present
Executive Officer (EDHI)

Lawrence R. Codey.......... 52 President and Chief Operating September 1991 to present
Officer (PSE&G)

Robert C. Murray........... 51 Vice President and Chief Financial January 1992 to present
Officer (Enterprise)

Senior Vice President and Chief January 1992 to present
Financial Officer (PSE&G)

Patricia A. Rado........... 54 Vice President and Controller April 1993 to present
(Enterprise)

Vice President and Controller April 1993 to present
(PSE&G)

Controller of Yankee Energy July 1989 to April 1993
Systems Incorporated

R. Edwin Selover........... 51 Vice President and General Counsel April 1988 to present
(Enterprise)

Senior Vice President and General January 1988 to present
Counsel (PSE&G)

Frank Cassidy.............. 49 President and Chief Executive November 1996 to present
Officer (Energis Resources)

Senior Vice President--Fossil February 1995 to November 1996
Generation (PSE&G)

Vice President--Transmission November 1989 to February 1995
Systems (PSE&G)

Robert J. Dougherty, Jr.... 45 President and Chief Operating January 1997 to present
Officer (EDHI)

President--Enterprise Ventures and February 1995 to December 1996
Services Corporation

Senior Vice President--Electric September 1991 to February 1995
(PSE&G)

Age Effective Date
Name December 31, 1996 Office First Elected to Present
Position
- ----------------------------- --------------------- ------------------------------------------------------------------------

Leon R. Eliason............. 57 Chief Nuclear Officer and October 1994 to present
President--Nuclear Business Unit
(PSE&G)

President--Power Supply Business January 1993 to September 1994
Unit, Northern States Power
Company

Vice President--Nuclear Generation, July 1990 to January 1993
Northern States Power

Alfred C. Koeppe............ 50 Senior Vice President--Corporate October 1996 to present
Services and External Affairs

Senior Vice President--External October 1995 to October 1996
Affairs (PSE&G)

President and Chief Executive February 1993 to October 1995
Officer, Bell Atlantic--New Jersey

Vice President--Public Affairs, February 1991 to February 1993
Bell Atlantic--New Jersey

Michael J. Thomson.......... 38 President and Chief Executive January 1997 to present
Officer
(CEA)

Senior Vice President and Chief February 1994 to December 1996
Operating Officer (CEA)

Senior Vice President (CEA) July 1993 to February 1994

Vice President--Business July 1992 to July 1993
Development and Planning (EDHI)

Director--Business Planning and April 1991 to July 1992
Development (EDHI)

Item 11. Executive Compensation

Enterprise

The information required by Item 11 of Form 10-K is set forth under the
heading "Executive Compensation" in Enterprise's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held April 15, 1997 which definitive
Proxy Statement is expected to be filed with the Securities and Exchange
Commission on or about March 3, 1997 and such information set forth under such
heading is incorporated herein by this reference thereto.

PSE&G

Information regarding the compensation of the Chief Executive Officer and
the four most highly compensated executive officers of PSE&G as of December 31,
1996 is set forth below. Amounts shown were paid or awarded for all services
rendered to Enterprise and its subsidiaries and affiliates including PSE&G.

SUMMARY COMPENSATION TABLE

Annual Compensation Awards Payouts
---------------------------- ---------- -----------

Bonus/Annual LTIP All Other
Salary Incentive Options Payouts Compensation
Name and Principal Position Year $ Award($)(1) (#)(2) ($)(3) ($)(4)
- --------------------------------------------------------------------------------------------------------------------

E. James Ferland................. 1996 712,261 (5) 6,500 168,084 10,994
Chairman of the Board, President 1995 682,377 225,411 5,800 246,288 8,681
and CEO of Enterprise 1994 652,492 251,383 5,400 127,140 5,628

Lawrence R. Codey................ 1996 435,327 (5) 3,000 81,144 5,934
President and Chief Operating 1995 418,392 141,931 2,800 118,746 5,756
Officer of PSE&G 1994 398,468 129,276 2,500 48,900 5,351

Robert J. Dougherty, Jr.......... 1996 379,586(11) (5) 2,600 57,960 4,444
President of Enterprise Ventures 1995 322,759 111,259 2,500 70,368 4,269
and Services Corporation (8) 1994 273,946 72,027 1,800 26,895 4,227

Leon R. Eliason................. 1996 336,706 100,000(5)(6) 2,500 34,776 6,239
President--Nuclear 1995 323,755 229,168(7) 5,500 26,388 3,242
Business Unit and Chief Nuclear 1994 74,713 0 600 0 0
Officer of PSE&G (9)

Robert C. Murray................ 1996 332,721 (5) 2,000 57,960 5,248
Vice President and Chief Financial 1995 318,775 117,577(5)(10) 2,000 70,368 5,169
Officer of Enterprise 1994 303,832 152,621(10) 1,800 26,895 4,944

(1) Amount awarded in given year was earned under Management Incentive
Compensation Plan (MICP) and determined in following year with respect to
the given year based on individual performance and financial and operating
performance of Enterprise and PSE&G, including comparison to other
companies. For plan years prior to 1996, the award is accounted for as
market-priced phantom stock with dividend reinvestment at 95% of market
price, with payment made over three years beginning in second year
following grant. Beginning in 1997 with respect to the 1996 and future plan
years, awards will be payable in one lump sum and not deferred.

(2) Granted under Long-Term Incentive Plan (LTIP) in tandem with equal number
of performance units and dividend equivalents which may provide cash
payments, dependent upon future financial performance of Enterprise in
comparison to other companies and dividend payments by Enterprise, to
assist recipients in exercising options granted. The grant is made at the
beginning of a three-year performance period and cash payment of the value
of such performance units and dividend equivalents is made following such
period in proportion to the options, if any, exercised at such time.

(3) Amount paid in proportion to options exercised, if any, based on value of
previously granted performance units and dividend equivalents, each as
measured during three-year period ending the year prior to the year in
which payment is made.

(4) Includes employer contribution to Thrift and Tax-Deferred Savings Plan and
value of 5% discount on phantom stock dividend reinvestment under MICP:

Ferland Codey Dougherty Eliason Murray
------------------ --------------------------------------------------------- -----------------
Thrift MICP Thrift MICP Thrift MICP Thrift MICP Thrift MICP
($) ($) ($) ($) ($) ($) ($) ($) ($) ($)
------------------ --------------------------------------------------------- -----------------

1996................. 4,150 2,861 4,502 1,432 3,750 694 2,678 212 4,502 746
1995................. 3,752 2,383 4,502 1,254 3,754 515 1,795 0 4,502 667
1994................. 3,751 1,877 4,197 1,154 3,752 475 0 0 4,504 440

In addition, 1996 and 1995 amounts include for Mr. Ferland $3,983 and
$2,546 and for Mr. Eliason $3,349 and $1,447, respectively, representing
interest on compensation deferred under PSE&G's Deferred Compensation Plan in
excess of 120% of the applicable federal long-term rate as prescribed under
Section 1274(d) of the Internal Revenue Code. Under PSE&G's Deferred
Compensation Plan, interest is paid at prime rate plus 1/2%, adjusted quarterly.

(5) The 1996 MICP award amount has not yet been determined. The target award is
40% of salary for Mr. Ferland, 30% for Messrs. Codey, Dougherty and Eliason
and 25% for Mr. Murray. The target award is adjusted to reflect
Enterprise's return on capital, PSE&G's comparative electric and gas costs
and individual performance.

(6) Amount paid pursuant to Mr. Eliason's employment agreement.

(7) Includes $165,000 paid pursuant to Mr. Eliason's employment agreement.

(8) Mr. Dougherty became President and Chief Operating Officer of EDHI on
January 1, 1997.

(9) Mr. Eliason commenced employment September 26, 1994.

(10) 1995 amount includes $25,000 paid pursuant to Mr. Murray's employment
agreement. 1994 amount includes $50,000 paid pursuant to Mr. Murray's
employment agreement.

OPTION GRANTS IN LAST FISCAL YEAR (1996)

Individual Grants Potential Realizable
-------------------------------------------------
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock Price
Underlying Employees Exercise or Appreciation for Option
Options in Base Price Expiration Term(2)
---------------------------
Name Granted(1) Fiscal Year ($/Sh) Date 0%($) 5%($) 10%($)
- ---------------------------------------------------------------------------------------------------------------------------

E. James Ferland.............................. 6,500 22.6 30.875 1/03/06 0 126,211 319,844
Lawrence R. Codey............................. 3,000 10.5 30.875 1/03/06 0 58,251 147,620
Robert J. Dougherty, Jr. ..................... 2,600 9.1 30.875 1/03/06 0 50,485 127,938
Leon R. Eliason............................... 2,500 8.7 30.875 1/03/06 0 48,543 123,017
Robert C. Murray.............................. 2,000 7.0 30.875 1/03/06 0 38,834 94,414

(1) Granted under LTIP in tandem with equal number of performance units and
dividend equivalents which may provide cash payments, dependent on future
financial performance of Enterprise in comparison to other companies and
dividend payments by Enterprise, to assist recipients in exercising
options, with exercisability commencing January 1, 1999. Cash payment is
made, based on the value, if any, of performance units awarded and dividend
equivalents accrued, if any, as measured during the three-year period
ending the year prior to the year in which payment, if any, is made, only
if the specified performance level is achieved, dividend equivalents have
accrued and options are exercised.

(2) All options reported have a ten-year term, as noted. Amounts shown
represent hypothetical future values at such term based upon hypothetical
price appreciation of Enterprise Common Stock and may not necessarily be
realized. Actual values which may be realized, if any, upon any exercise of
such options, will be based on the market price of Enterprise Common Stock
at the time of any such exercise and thus are dependent upon future
performance of Enterprise Common Stock.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1996) AND
FISCAL YEAR END OPTION VALUES (12/31/96)

Value of Unexercised
Number of Unexercised In-The-Money Options
Options At Fy-End(#)(1) At Fy-End($)(3)
------------------------------ -------------------------------

Shares
Acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#)(1) ($)(2) (#) (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------

E. James Ferland................... 5,800 2,900 0 17,700 0 3,625
Lawrence R. Codey.................. 2,800 0 700 8,300 2,100 1,750
Robert J. Dougherty................ 2,000 0 0 6,900 0 1,250
Leon R. Eliason.................... 1,200 0 0 6,800 0 1,562
Robert C. Murray................... 2,000 0 0 5,800 0 1,250

(1) Does not reflect any options granted and/or exercised after year end
(12/31/96). The net effect of any such grants and exercises is reflected in
the table appearing under Security Ownership of Directors and Management.

(2) Represents difference between exercise price and market price of
Enterprise Common Stock on date of exercise.

(3) Represents difference between market price of Enterprise Common Stock and
the respective exercise prices of the options at fiscal year end
(12/31/96). Such amounts may not necessarily be realized. Actual values
which may be realized, if any, upon any exercise of such options will be
based on the market price of Enterprise Common Stock at the time of any
such exercise and thus are dependent upon future performance of Enterprise
Common Stock.

Employment Contracts and Arrangements

Employment agreements were entered into with Messrs. Ferland, Eliason and
Murray at the time of their employment. For Mr. Ferland, the remaining
applicable provisions of the agreement provide for additional credited service
for retirement benefits purposes in the amount of 22 years. The principal
remaining applicable terms of the agreement with Mr. Eliason provide for payment
of severance in the amount of one year's salary, if discharged without cause
during his first five years of employment which began in September 1994, for
lump sum cash payments of $65,000 in 1997 and $35,000 in 1998 to align Mr.
Eliason with MICP payments for other executive officers, and additional years of
credited service for retirement benefits for allied work experience of 19 years
after completion of three years of service, and up to 29 years after completion
of ten years of service. The principal remaining applicable terms of the
agreement with Mr. Murray provide for additional years of credited service for
retirement benefits purposes for allied work experience of five years after
completion of five years of service, and up to fifteen years after completion of
ten years of service.

Compensation Committee Interlocks and Insider Participation

PSE&G does not have a compensation committee. Decisions regarding
compensation of PSE&G's executive officers are made by the Organization and
Compensation Committee of Enterprise. Hence, during 1996 the PSE&G Board of
Directors did not have, and no officer, employee or former officer of PSE&G
participated in any deliberations of such Board, concerning executive officer
compensation.

Compensation of Directors and Certain Business Relationships

A director who is not an officer of Enterprise or its subsidiaries and
affiliates, including PSE&G, is paid an annual retainer of $22,000 and a fee of
$1,200 for attendance at any Board or committee meeting, inspection trip,
conference or other similar activity relating to Enterprise, PSE&G or EDHI. Each
of the directors of PSE&G is also a director of Enterprise. No additional
retainer is paid for service as a director of PSE&G. Fifty percent of the annual
retainer is paid in Enterprise Common Stock.

Enterprise also maintains a Stock Plan for Outside Directors pursuant to
which directors who are not employees of Enterprise or its subsidiaries receive
300 shares of restricted stock for each year of service as a director. Such
shares held by each non-employee director are included in the table below under
Item 12. Security Ownership of Certain Beneficial Owners and Management. Prior
to 1996, Enterprise had maintained a retirement plan for non-employee directors
which provided an annual benefit for life equal to the annual Board retainer in
effect at the time the director's service terminated if the director retired
from the Board after 10 years of service. Participation of all current directors
under that plan was terminated December 31, 1995. As of January 1, 1996, current
non-employee directors with ten years or more of service received an award of
shares of restricted stock equal to the present value of the retirement benefit
under this prior retirement plan, while those with less than ten years of
service received an award of 300 shares per year of service. The number of
shares awarded were as follows: Mr. Gilmartin: 900; Mr. Lerner: 3,768; Mr.
Pitney: 5,467; and Dr. Remick: 300. No current director remains eligible to
receive a benefit under the prior retirement plan.

The restrictions on the stock granted under the Stock Plan for Outside
Directors provide that the shares are subject to forfeiture if the director
leaves service at any time prior to the Annual Meeting of Stockholders following
his or her 70th birthday. This restriction would be deemed to have been
satisfied if the director's service were terminated if Enterprise were to merge
with another corporation and not be the surviving corporation or if the director
were to die in office. Enterprise also has the ability to waive this restriction
for good cause shown. Restricted stock may not be sold or otherwise transferred
prior to the lapse of the restrictions. Dividends on shares held subject to
restrictions are paid directly to the director, and the director has the right
to vote the shares.

Compensation Pursuant to Pension Plans

The table below illustrates annual retirement benefits expressed in terms
of single life annuities based on the average final compensation and service
shown and retirement at age 65. A person's annual retirement benefit is based
upon a percentage that is equal to years of credited service plus 30, but not
more than 75%, times average final compensation at the earlier of retirement,
attainment of age 65 or death. These amounts are reduced by Social Security
benefits and certain retirement benefits from other employers. Pensions in the
form of joint and survivor annuities are also available.

PENSION PLAN TABLE

Average Final Length of Service
-----------------------------------------------------------------------
Compensation 30 Years 35 Years 40 Years 45 Years
- --------------------- ---------------- ----------------- ----------------- -----------------

$ 300,000 $180,000 $195,000 $210,000 $225,000
400,000 240,000 260,000 280,000 300,000
500,000 300,000 325,000 350,000 375,000
600,000 360,000 390,000 420,000 450,000
700,000 420,000 455,000 490,000 525,000
800,000 480,000 520,000 560,000 600,000
900,000 540,000 585,000 630,000 675,000
1,000,000 600,000 650,000 700,000 750,000

Average final compensation, for purposes of retirement benefits of
executive officers, is generally equivalent to the average of the aggregate of
the salary and bonus amounts reported in the Summary Compensation Table above
under 'Annual Compensation' for the five years preceding retirement, not to
exceed 130% of the average annual salary for such five year period. Messrs.
Ferland, Codey, Dougherty, Eliason and Murray will have accrued approximately
48, 41, 48, 42 and 39 years of credited service, respectively, as of age 65.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Enterprise

The information required by Item 12 of Form 10-K with respect to directors
and executive officers is set forth under the heading 'Security Ownership of
Directors and Management' in Enterprise's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held April 15, 1997 which definitive Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about March 3, 1997 and such information set forth under such heading is
incorporated herein by this reference thereto.

PSE&G

All of PSE&G's 132,450,344 outstanding shares of Common Stock are owned
beneficially and of record by PSE&G's parent, Enterprise, 80 Park Plaza, P.O.
Box 1171, Newark, New Jersey.

The following table sets forth beneficial ownership of Enterprise Common
Stock, including options, by the directors and executive officers named below as
of January 31, 1997. None of these amounts exceed 1% of the Enterprise Common
Stock outstanding at such date. No director or executive officer owns any PSE&G
Preferred Stock of any class.

Amount and
Nature of
Beneficial
Name Ownership
- -------------------------------------------------------- --------------------
Lawrence R. Codey..................................... 25,811 (1)
Robert J. Dougherty, Jr............................... 17,618 (2)
Leon R. Eliason....................................... 11,600 (3)
E. James Ferland...................................... 72,206 (4)
Raymond V. Gilmartin.................................. 3,130
Irwin Lerner.......................................... 9,168
Robert C. Murray...................................... 16,964 (5)
James C. Pitney....................................... 9,888
Forrest J. Remick..................................... 1,457
All directors and executive officers (12) as a group.. 188,961 (6)

(1) Includes options to purchase 13,200 additional shares, 3,200 of which are
currently exercisable.

(2) Includes the equivalent of 739 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 10,500 additional
shares, 1,800 of which are currently exercisable.

(3) Includes options to purchase 9,800 additional shares, 1,800 of which are
currently exercisable.

(4) Includes the equivalent of 10,159 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 25,700 additional
shares, 5,400 of which are currently exercisable.

(5) Includes the equivalent of 964 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 8,800 additional
shares, 1,800 of which are currently exercisable.

(6) Includes the equivalent of 11,841 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 81,900 additional
shares, of which 18,300 are currently exercisable.

Item 13. Certain Relationships and Related Transactions

Enterprise

The information required by Item 13 of Form 10-K is set forth under the
heading "Executive Compensation" in Enterprise's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held April 15, 1997, which definitive
Proxy Statement is expected to be filed with the Securities and Exchange
Commission on or about March 3, 1997. Such information set forth under such
heading is incorporated herein by this reference thereto.

PSE&G

None.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements:

(1) Enterprise Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994, on page 59.

Enterprise Consolidated Balance Sheets for the years ended
December 31, 1996 and 1995, on pages 60 and 61.

Enterprise Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995, and 1994 on page 62.

Enterprise Statements of Retained Earnings for the years ended
December 31, 1996, 1995, and 1994 on page 63.

Enterprise Notes to Consolidated Financial Statements on pages 70
through 101.

(2) PSE&G Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994, on page 65.

PSE&G Consolidated Balance Sheets for the years ended December 31,
1996 and 1995, on pages 66 and 67.

PSE&G Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 on page 68.

PSE&G Statements of Retained Earnings for the years ended December
31, 1996, 1995, and 1994 on page 69.

PSE&G Notes to Consolidated Financial Statements on pages 102
through 105.

(b) The following documents are filed as a part of this report:

(1) Enterprise Financial Statement Schedules:

Schedule II--Valuation and Qualifying Accounts for each of the
three years in the period ended December 31, 1996 (page 117).

(2) PSE&G Financial Statement Schedules:

Schedule II--Valuation and Qualifying Accounts for each of the
three years in the period ended December 31, 1996 (page 118).

Schedules other than those listed above are omitted for the reason
that they are not required or are not applicable, or the required
information is shown in the consolidated financial statements or
notes thereto.

(c) The following exhibits are filed herewith:

(1) Enterprise:

4a(94) Pollution Control Series W Supplemental Indenture
10a(20) Management Incentive Compensation Program
12 Computation of Ratios of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule

(See Exhibit Index on pages 121 through 128).

(2) PSE&G:

4a(94) Pollution Control Series W Supplemental Indenture
10a(19) Management Incentive Compensation Program
12(a) Computation of Ratios of Earnings to Fixed Charges
12(b) Computation of Ratios of Earnings to Fixed Charges Plus
Preferred Securities Dividend Requirements
23 Independent Auditors' Consent
27 Financial Data Schedule

(See Exhibit Index on page 121 and pages 129 through 135.)

(d) The following reports on Form 8-K were filed by the registrant(s) named
below during the last quarter of 1996 and the 1997 period covered by this report
under Item 5:

Registrant Date of Report Item Reported
---------- -------------- -------------

Enterprise and PSE&G January 29, 1997 Item 5. Other Events (PSE&G--
Nuclear Operations)

Enterprise and PSE&G January 24, 1997 Item 5. Other Events (PSE&G--
Competition/Rate Matters/
Regulation; PSE&G--Nuclear
Operations; PSE&G--Rate
Matters; and Legal Proceedings)

Enterprise and PSE&G October 23, 1996 Item 5. Other Events (PSE&G--
Rate Matters--Nuclear
Performance Standard--Nuclear
Operations (Salem))

SCHEDULE II

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 1996--December 31, 1994

- ---------------------------------------------------------------------------------------------------------------------------
Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning cost and other Deductions- end of
of accounts-
Description period expenses describe describe period
- ---------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)

1996
Allowance for Doubtful Accounts.......... $ 38,003 $ 42,376 $ -- $ 38,096 (A) $ 42,283
Discount on Property Abandonments........ $ 7,466 $ -- $ -- $ 3,038 (B) $ 4,428
Inventory Valuation Reserve.............. $ 20,100 $ -- $ -- $ 4,000 $ 16,100
Other Valuation Allowances............... $ -- $ 17,873 $ -- $ 78 $ 17,795

1995
Allowance for Doubtful Accounts.......... $ 40,977 $ 32,855 $ -- $ 35,829 (A) $ 38,003
Discount on Property Abandonments........ $ 11,423 $ -- $ -- $ 3,957 (B) $ 7,466
Inventory Valuation Reserve.............. $ 18,200 $ 1,900 $ -- $ -- $ 20,100
Other Valuation Allowances (C)........... $ -- $ -- $ -- $ -- $ --

1994
Allowance for Doubtful Accounts.......... $ 27,948 $ 50,188 $ -- $ 37,159 (A) $ 40,977
Discount on Property Abandonments........ $ 16,263 $ -- $ -- $ 4,840 (B) $ 11,423
Inventory Valuation Reserve.............. $ 8,525 $ 9,950 $ -- $ 275 $ 18,200
Other Valuation Allowances (C)........... $ -- $ -- $ -- $ -- $ --

NOTES:

(A) Accounts Receivable/Investments written off.

(B) Amortization of discount to income.

(C) Valuation Allowance eliminated in 1994 and 1995 to conform with
current presentation.

SCHEDULE II

PUBLIC SERVICE ELECTRIC AND GAS COMPANY

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 1996--December 31, 1994

- ---------------------------------------------------------------------------------------------------------------------------
Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning cost and other Deductions- end of
of accounts-
Description period expenses describe describe period
- ---------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)

1996
Allowance for Doubtful Accounts.......... $ 38,003 $ 42,376 $ -- $ 38,096 (A) $ 42,283
Discount on Property Abandonments........ $ 7,466 $ -- $ -- $ 3,038 (B) $ 4,428
Inventory Valuation Reserve.............. $ 20,100 $ -- $ -- $ 4,000 $ 16,100
Other Valuation Allowances............... $ -- $ 14,047 $ -- $ 78 $ 13,969

1995
Allowance for Doubtful Accounts.......... $ 40,977 $ 32,855 $ -- $ 35,829 (A) $ 38,003
Discount on Property Abandonments........ $ 11,423 $ -- $ -- $ 3,957 (B) $ 7,466
Inventory Valuation Reserve.............. $ 18,200 $ 1,900 $ -- $ -- $ 20,100
Other Valuation Allowances............... $ -- $ -- $ -- $ -- $ --

1994
Allowance for Doubtful Accounts.......... $ 27,948 $ 50,188 $ -- $ 37,159 (A) $ 40,977
Discount on Property Abandonments........ $ 16,263 $ -- $ -- $ 4,840 (B) $ 11,423
Inventory Valuation Reserve.............. $ 8,525 $ 9,950 $ -- $ 275 $ 18,200
Other Valuation Allowances............... $ -- $ -- $ -- $ -- $ --

NOTES:

(A) Accounts Receivable/Investments written off.

(B) Amortization of discount to income.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

By E. JAMES FERLAND
E. James Ferland
Chairman of the Board, President
and Chief Executive Officer

Date: February 26, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

E. JAMES FERLAND Chairman of the Board, February 26, 1997
- ------------------------ President and Chief
E. James Ferland Executive Officer
and Director
(Principal Executive
Officer)

ROBERT C. MURRAY Vice President and February 26, 1997
- ------------------------ Chief Financial
Robert C. Murray Officer (Principal
Financial Officer)

PATRICIA A. RADO Vice President and February 26, 1997
- ------------------------ Controller (Principal
Patricia A. Rado Accounting Officer)

LAWRENCE R. CODEY Director February 26, 1997
- -----------------------
Lawrence R. Codey

ERNEST H. DREW Director February 26, 1997
- ------------------------
Ernest H. Drew

T. J. DERMOT DUNPHY Director February 26, 1997
- ------------------------
T. J. Dermot Dunphy

------------------------ Director February 26, 1997
Raymond V. Gilmartin

IRWIN LERNER Director February 26, 1997
- ------------------------
Irwin Lerner

MARILYN M. PFALTZ Director February 26, 1997
- ----------------------
Marilyn M. Pfaltz

Director February 26, 1997
- ----------------------
James C. Pitney

FORREST J. REMICK Director February 26, 1997
- ----------------------
Forrest J. Remick

RICHARD J. SWIFT Director February 26, 1997
- ----------------------
Richard J. Swift

JOSH S. WESTON Director February 26, 1997
- ----------------------
Josh S. Weston

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

PUBLIC SERVICE ELECTRIC AND GAS COMPANY

By E. JAMES FERLAND
-------------------------------
E. James Ferland
Chairman of the Board
and Chief Executive Officer

Date: February 26, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date

E. JAMES FERLAND Chairman of the Board, February 26, 1997
- ------------------------ President and Chief
E. James Ferland Executive Officer
and Director
(Principal Executive
Officer)

ROBERT C. MURRAY Vice President and February 26, 1997
- ------------------------ Chief Financial
Robert C. Murray Officer (Principal
Financial Officer)

PATRICIA A. RADO Vice President and February 26, 1997
- ------------------------ Controller (Principal
Patricia A. Rado Accounting Officer)

LAWRENCE R. CODEY Director February 26, 1997
- -----------------------
Lawrence R. Codey

Director February 26, 1997
- -----------------------
Raymond V. Gilmartin

IRWIN LERNER Director February 26, 1997
- -----------------------
Irwin Lerner

Director February 26, 1997
- -----------------------
James C. Pitney

FORREST J. REMICK Director February 26, 1997
- -----------------------
Forrest J. Remick

EXHIBIT INDEX

Certain Exhibits previously filed with the Commission and the appropriate
securities exchanges are indicated as set forth below. Such Exhibits are not
being refiled, but are included because inclusion is desirable for convenient
reference.

(a) Filed by PSE&G with Form 8-A under the Securities Exchange Act of
1934, on the respective dates indicated, File No. 1-973.

(b) Filed by PSE&G with Form 8-K under the Securities Exchange Act of
1934, on the respective dates indicated, File No. 1-973.

(c) Filed by PSE&G with Form 10-K under the Securities Exchange Act
of 1934, on the respective dates indicated, File No. 1-973.

(d) Filed by PSE&G with Form 10-Q under the Securities Exchange Act
of 1934, on the respective dates indicated, File No. 1-973.

(e) Filed by Enterprise with Form 10-K under the Securities Exchange
Act of 1934, on the respective dates indicated, File No. 1-9120.

(f) Filed with registration statement of PSE&G under the Securities
Exchange Act of 1934, File No. 1-973, effective July 1, 1935,
relating to the registration of various issues of securities.

(g) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-4995, effective May 20, 1942, relating to the
issuance of $15,000,000 First and Refunding Mortgage Bonds, 3%
Series due 1972.

(h) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-7568, effective July 1, 1948, relating to the
proposed issuance of 200,000 shares of Cumulative Preferred
Stock.

(i) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-8381, effective April 18, 1950, relating to
the issuance of $26,000,000 First and Refunding Mortgage Bonds, 2
3/4% Series due 1980.

(j) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-12906, effective December 4, 1956, relating to
the issuance of 1,000,000 shares of Common Stock.

(k) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-59675, effective September 1, 1977, relating
to the issuance of $60,000,000 First and Refunding Mortgage
Bonds, 8 1/8% Series I due 2007.

(l) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-60925, effective March 30, 1978, relating to
the issuance of 750,000 shares of Common Stock through an
Employee Stock Purchase Plan.

(m) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-65521, effective October 10, 1979, relating to
the issuance of 3,000,000 shares of Common Stock.

(n) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 2-74018, filed on June 16, 1982, relating to the
Thrift Plan of PSE&G.

(o) Filed with registration statement of Public Service Enterprise
Group Incorporated under the Securities Act of 1933, No. 33-2935
filed January 28, 1986, relating to PSE&G's plan to form a
holding company as part of a corporate restructuring.

(p) Filed with registration statement of PSE&G under the Securities
Act of 1933, No. 33-13209 filed April 9, 1987, relating to the
registration of $575,000,000 First and Refunding Mortgage Bonds
pursuant to Rule 415.

ENTERPRISE

Exhibit Number
- ---------------------------------------------------
This Previous Filing
------------------------------------
Filing Commission Exchanges
3a (o) 3a (o) 3a Certificate of Incorporation
Public Service Enterprise
Group Incorporated

3b (e) 3b (e) 3b Copy of By-Laws of Public
4/11/88 Service Enterprise Group
Incorporated, as in effect
May 1,1987

3c (e) 3c (e) 3c Certificate of Amendment of
4/11/88 Certificate of Incorporation
of Public Service Enterprise
Group Incorporated,
effective April 23, 1987

4a(1) (f) B-1 (c) 4b(1)
2/18/81 Indenture
between PSE&G and Fidelity
Union Trust Company, (now
First Union National Bank) as
Trustee, dated August 1, 1924,
securing First and Refunding
Mortgage Bonds

Indentures between PSE&G and
First Union National Bank as
Trustee, supplemental to
Exhibit 4a(1), dated as
follows:

4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927
2/18/81

4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937
2/18/81

4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937
2/18/81

4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939
2/18/81

4a(6) (g) B-10 (c) 4b(6) March 1, 1942
2/18/81

4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949
2/18/81

4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950
2/18/81

4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953
2/18/81

4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954
2/18/81

4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956
2/18/81

4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957
2/18/81

4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958
2/18/81

4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959
2/18/81

ENTERPRISE

Exhibit Number
- ---------------------------------------------------
This Previous Filing
Filing Commission Exchanges
- --------------
4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960
2/18/81

4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962
2/18/81

4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963
2/18/81

4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964
2/18/81

4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965
2/18/81

4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967
2/18/81

4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968
2/18/81

4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969
2/18/81

4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970
2/18/81

4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971
2/18/81

4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971
2/18/81

4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972
2/18/81

4a(27) (a) 2 (c) 4b(27) March 1, 1974
3/29/74 2/18/81

4a(28) (a) 2 (c) 4b(28) October 1, 1974
10/11/74 2/18/81

4a(29) (a) 2 (c) 4b(29) April 1, 1976
4/6/76 2/18/81

4a(30) (a) 2 (c) 4b(30) September 1, 1976
9/16/76 2/18/81

4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976
2/18/81

4a(32) (a) 2 (c) 4b(32) June 1, 1977
6/29/77 2/18/81

4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977
2/18/81

Exhibit Number
- ----------------------------------------------------
This Previous Filing
Filing Commission Exchanges
- --------------
4a(34) (a) 2 (c) 4b(34) November 1, 1978
11/21/78 2/18/81

4a(35) (a) 2 (c) 4b(35) July 1, 1979
7/25/79 2/18/81

4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1)
2/18/81

4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2)
2/18/81

4a(38) (a) 2 (c) 4b(38) November 1, 1979
12/3/79 2/18/81

4a(39) (a) 2 (c) 4b(39) June 1, 1980
6/10/80 2/18/81

4a(40) (a) 2 (a) 2 August 1, 1981
8/19/81 8/19/81

4a(41) (b) 4e (b) 4e April 1, 1982
4/29/82 5/5/82

4a(42) (a) 2 (a) 2 September 1, 1982
9/17/82 9/20/82

4a(43) (a) 2 (a) 2 December 1, 1982
12/21/82 12/21/82

4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983
7/26/83 7/27/83

4a(45) (a) 4 (a) 4 August 1, 1983
8/19/83 8/19/83

4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984
8/14/84 8/17/84

4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984
11/2/84 11/9/84

4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1)
1/4/85 1/9/85

4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2)
1/4/85 1/9/85

4a(50) (a) 2 (a) 2 July 1, 1985
8/2/85 8/2/85

4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986
2/11/86 2/11/86

4a(52) (a) 2 (a) 2 March 1, 1986
3/28/86 3/28/86

Exhibit Number
- ----------------------------------------------------
This Previous Filing
Filing Commission Exchanges
- --------------
4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1)
5/1/86 5/1/86

4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2)
5/1/86 5/1/86

4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987
4/9/87 4/9/87

4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1)
8/17/87 8/17/87

4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2)
11/13/87 11/20/87

4a(58) (a) 4 (a) 4 May 1, 1988
5/17/88 5/18/88

4a(59) (a) 4 (a) 4 September 1, 1988
9/27/88 9/28/88

4a(60) (a) 4 (a) 4 July 1, 1989
7/25/89 7/26/89

4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1)
7/25/90 7/26/90

4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2)
7/25/90 7/26/90

4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1)
7/1/91 7/2/91

4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2)
7/1/91 7/2/91

4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1)
12/2/91 12/3/91

4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2)
12/2/91 12/3/91

4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3)
12/2/91 12/3/91

4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1)
2/27/92 2/28/92

4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2)
2/27/92 2/28/92

4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1)
6/17/92 6/11/92

4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2)
6/17/92 6/11/92

Exhibit Number
- ----------------------------------------------------
This Previous Filing
Filing Commission Exchanges
- --------------
4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3)
6/17/92 6/11/92

4a(73) (a) 4 (a) 4 January 1, 1993 (No.1)
2/2/93 2/2/93

4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2)
2/2/93 2/2/93

4a(75) (a) 4 (a) 4 March 1, 1993
3/17/93 3/18/93

4a(76) (b) 4 (a) 4 May 1, 1993
5/27/93 5/28/93

4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2)
5/25/93 5/25/93

4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3)
5/25/93 5/25/93

4a(79) (b) 4 (b) 4 July 1, 1993
12/1/93 12/1/93

4a(80) (a) 4 (a) 4 August 1, 1993
8/3/93 8/3/93

4a(81) (b) 4 (b) 4 September 1, 1993
12/1/93 12/1/93

4a(82) (b) 4 (b) 4 September 1, 1993 (No. 2)
12/1/93 12/1/93

4a(83) (b) 4 (b) 4 November 1, 1993
12/1/93 12/1/93

4a(84) (a) 4 (a) 4 February 1, 1994
2/3/94 2/14/94

4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1)
3/15/94 3/16/94

4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2)
3/15/94 3/16/94

4a(87) (d) 4 (d) 4 May 1, 1994
11/8/94 12/2/94

4a(88) (d) 4 (d) 4 June 1, 1994
11/8/94 12/2/94

4a(89) (d) 4 (d) 4 August 1, 1994
11/8/94 12/2/94

- ----------------------------------------------------
Exhibit Number
- ----------------------------------------------------
This Previous Filing
Filing Commission Exchanges
- --------------

4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1)
11/8/94 12/2/94

4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2)
11/8/94 12/2/94

4a(92) (a) 4 (a) 4 January 1, 1996 (No. 1)
1/26/96 1/26/96

4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2)
1/26/96 1/26/96

4a(94) December 1, 1996

4b (h) 7(12) (c) 4c(1) Indenture between PSE&G and
2/18/81 Federal Trust Company, as
Trustee (Midlantic National
Bank, Successor Trustee) dated
July 1, 1948, providing for 6%
Debenture Bonds due 1998

4c (l) 2c(8) (c) 4c(8) Indenture between PSE&G and
2/18/81 Chase Manhattan Bank (National
Association), as Trustee,
dated August 15, 1971
providing for 7 3/4% Debenture
Bonds due 1996

4d (b) 4 (b) 4 Indenture of Trust between
12/1/93 12/1/93 PSE&G and Chase Manhattan Bank
(National Association), as
Trustee, providing for
Secured Medium-Term Notes
dated July 1, 1993

4e(1) (c) (c) Indenture between PSE&G and
2/23/95 2/23/95 First Union National Bank,
National Association (now
known as First Union National
Bank), as Trustee, dated
November 1, 1994, providing
for Deferrable Interest
Subordinated Debentures in
Series

4e(2) (a) (a) Supplemental Indenture between
9/11/95 9/11/95 PSE&G and First Fidelity Bank,
National Association (now
known as First Union National
Bank), as Trustee, dated
September 1, 1995 providing
for Deferrable Interest
Subordinated Debentures,
Series B

9 Inapplicable

10a(1) (c) 10c(1) (c) 10c(1) Directors' Deferred
3/17/82 3/19/82 Compensation Plan

10a(2) (c) 10c(2) (c) 10c(2) Officers' Deferred
3/17/82 3/19/82 Compensation Plan

10a(3) (c) 10c(3) (c) 10c(3) Supplemental Death Benefits
3/17/82 3/19/82 Plan for officers

10a(4) (c) 10c(4) (c) 10c(4) Description of additional
3/17/82 3/19/82 retirement benefits for
certain officers

10a(5)(i) (c) 10b(5) (c) 10b(5) Limited Supplemental Death
3/31/83 4/8/83 Benefits and Retirement Plan

Exhibit Number
- ----------------------------------------------------
This Previous Filing
Filing Commission Exchanges
- --------------
10a(5)(ii) (c) 10a(5)(ii) (c) 10a(5)(ii) Limited Supplemental Benefits
2/25/94 3/1/94 Plan for Certain Employees

10a(6)(i) (c) 10a(6) (c) 10a(6) Description of additional
3/10/87 4/16/87 retirement benefits for
certain officers

10a(6)(ii) (c) 10a(6)(1) (c) 10a(6)(1) Description of additional
3/30/90 3/30/90 retirement benefits for
certain officers

10a(6)(iii) (c) 10a(6)(2) (c) 10a(6)(2) Description of additional
3/30/92 4/27/92 retirement benefits for a
certain officer

10a(7) (c) 10a(8) (c) 10a(8) Long-Term Incentive Plan
3/30/89 4/18/89

10a(8) (c) 10a(9) (c) 10a(9) Public Service Enterprise
3/30/89 4/18/89 Group Incorporated Pension
Plan for Outside Directors

10a(9) (c) 10a(11) (c) 10a(11) Letter Agreement with
2/10/93 2/11/93 E. James Ferland dated
April 16, 1986

10a(10) (c) 10a(12) (c) 10a(12) Letter Agreement with
2/10/93 2/11/93 Paul H. Way dated
March 28, 1988

10a(11) (c) 10a(15) (c) 10a(15) Letter Agreement with
2/10/93 2/11/93 Robert C. Murray dated
December 17, 1991

10a(12) (c) 10a(14) (c) 10a(14) Letter Agreement with
2/26/94 3/9/94 Patricia A. Rado dated
March 24, 1993

10a(13) (c) 10a(15) (c) 10a(15) Letter Agreement, as amended,
2/23/95 2/23/95 with Leon R. Eliason dated
September 14, 1995

10a(14) (d) 10a(15) (d) 10a(15) Letter Agreement with
8/14/95 8/14/95 Louis F. Storz dated
July 7, 1996

10a(15) (d) 10a(16) (d) 10a(16) Letter Agreement with
8/14/95 8/14/95 Elbert C. Simpson dated
May 31, 1996

10a(16) (d) 10a(17) (d) 10a(17) Letter Agreement with
11/14/95 11/14/95 Alfred C. Koeppe dated
August 23, 1996

10a(17) (e) 10a(19) (e) 10a(19) Directors' Stock Plan
2/22/96 2/22/96

10a(18) (e) 10a(20) (e) 10a(20) Mid Career Hire Supplemental
2/22/96 2/22/96 Retirement Plan

10a(19) (e) 10a(21) (e) 10a(21) Retirement Income
2/22/96 2/22/96 Reinstatement Plan

10a(20) Management Incentive
Compensation Plan

11 Inapplicable

12 Computation of Ratios of
Earnings to Fixed Charges

Exhibit Number
- ----------------------------------------------------
This Previous Filing
Filing Commission Exchanges
- -----------

13 Inapplicable

16 Inapplicable

18 Inapplicable

21 Subsidiaries of the Registrant

22 Inapplicable

23 Independent Auditors' Consent

24 Inapplicable

27 Financial Data Schedule

28 Inapplicable

99 Inapplicable

PSE&G

Exhibit Number
- ---------------------------------------------------
This Previous Filing
-----------------------------------------
Filing Commission Exchanges
3a(1) (b) 3a (b) 3a Restated Certificate of
8/28/86 8/29/86 Incorporation of PSE&G,
effective May 1, 1986

3a(2) (c) 3a(2) (c) 3a(2) Certificate of Amendment of
4/10/87 Certificate of Restated
Certificate of Incorporation
of PSE&G filed February 18,
1987 with the State of New
Jersey adopting limitations of
liability provisions in
accordance with an amendment
to New Jersey Business
Corporation Act

3a(3) (a) 3(a)3 (a) 3(a)3 Certificate of Amendment of
2/3/94 2/14/94 Restated Certificate of
Incorporation of PSE&G filed
June 17, 1992 with the State
of New Jersey, establishing
the 7.44% Cumulative Preferred
Stock ($100 Par) as a series
of the Preferred Stock

3a(4) (a) 3(a)4 (a) 3(a)4 Certificate of Amendment of
2/3/94 2/14/94 Restated Certificate of
Incorporation of PSE&G filed
March 11, 1993 with the State
of New Jersey, establishing
the 5.97% Cumulative Preferred
Stock ($100 Par) as a series
of Preferred Stock

3a(5) (a) 3(a)5 (a) 3(a)5 Certificate of Amendment of
2/3/94 2/14/94 Restated Certificate of
Incorporation of PSE&G filed
January 27, 1995 with the
State of New Jersey,
establishing the 6.92%
Cumulative Preferred Stock
($100 Par) and the 6.75%
Cumulative Preferred Stock --
$25 Par as series of Preferred
Stock

3b Copy of By-Laws of PSE&G, as
in effect September 1, 1995

4a(1) (f) B-1 (c) 4b(1) Indenture between PSE&G and
2/18/81 Fidelity Union Trust Company,
(now First Union National
Bank, National Association),
as Trustee, dated August 1,
1924, securing First and
Refunding Mortgage Bond

Indentures between PSE&G and
First Fidelity Bank, National
Association, as Trustee,
supplemental to Exhibit 4a(1),
dated as follows:

4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927
2/18/81

4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937
2/18/81

4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937
2/18/81

4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939
2/18/81

Exhibit Number
This Previous Filing
- ---------------------------------------------------
Filing Commission Exchanges
4a(6) (g) B-10 (c) 4b(6) March 1, 1942
2/18/81

4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949
2/18/81

4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950
2/18/81

4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953
2/18/81

4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954
2/18/81

4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956
2/18/81

4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957
2/18/81

4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958
2/18/81

4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959
2/18/81

4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960
2/18/81

4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962
2/18/81

4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963
2/18/81

4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964
2/18/81

4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965
2/18/81

4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967
2/18/81

4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968
2/18/81

4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969
2/18/81

4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970
2/18/81

4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971
2/18/81

4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971
2/18/81

Exhibit Number
This Previous Filing
- ---------------------------------------------------
Filing Commission Exchanges
4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972
2/18/81

4a(27) (a) 2 (c) 4b(27) March 1, 1974
3/29/74 2/18/81

4a(28) (a) 2 (c) 4b(28) October 1, 1974
10/11/74 2/18/81

4a(29) (a) 2 (c) 4b(29) April 1, 1976
4/6/76 2/18/81

4a(30) (a) 2 (c) 4b(30) September 1, 1976
9/16/76 2/18/81

4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976
2/18/81

4a(32) (a) 2 (c) 4b(32) June 1, 1977
6/29/77 2/18/81

4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977
2/18/81

4a(34) (a) 2 (c) 4b(34) November 1, 1978
11/21/78 2/18/81

4a(35) (a) 2 (c) 4b(35) July 1, 1979
7/25/79 2/18/81

4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1)
2/18/81

4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2)
2/18/81

4a(38) (a) 2 (c) 4b(38) November 1, 1979
12/3/79 2/18/81

4a(39) (a) 2 (c) 4b(39) June 1, 1980
6/10/80 2/18/81

4a(40) (a) 2 (a) 2 August 1, 1981
8/19/81 8/19/81

4a(41) (b) 4e (b) 4e April 1, 1982
4/29/82 5/5/82

4a(42) (a) 2 (a) 2 September 1, 1982
9/17/82 9/20/82

4a(43) (a) 2 (a) 2 December 1, 1982
12/21/82 12/21/82

4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983
7/26/83 7/27/83

4a(45) (a) 4 (a) 4 August 1, 1983
8/19/83 8/19/83

Exhibit Number
- ---------------------------------------------------
This Previous Filing
-----------------------------------------
Filing Commission Exchanges
4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984
8/14/84 8/17/84

4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984
11/2/84 11/9/84

4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1)
1/4/85 1/9/85

4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2)
1/4/85 1/9/85

4a(50) (a) 2 (a) 2 July 1, 1985
8/2/85 8/2/85

4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986
2/11/86 2/11/86

4a(52) (a) 2 (a) 2 March 1, 1986
3/28/86 3/28/86

4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1)
5/1/86 5/1/86

4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2)
5/1/86 5/1/86

4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987
4/9/87 4/9/87

4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1)
8/17/87 8/17/87

4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2)
11/13/87 11/20/87

4a(58) (a) 4 (a) 4 May 1, 1988
5/17/88 5/18/88

4a(59) (a) 4 (a) 4 September 1, 1988
9/27/88 9/28/88

4a(60) (a) 4 (a) 4 July 1, 1989
7/25/89 7/26/89

4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1)
7/25/90 7/26/90

4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2)
7/25/90 7/26/90

4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1)
7/1/91 7/2/91

4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2)
7/1/91 7/2/91

4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1)
12/2/91 12/3/91

Exhibit Number
- ---------------------------------------------------
This Previous Filing
-----------------------------------------
Filing Commission Exchanges
4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2)
12/2/91 12/3/91

4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3)
12/2/91 12/3/91

4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1)
2/27/92 2/28/92

4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2)
2/27/92 2/28/92

4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1)
6/17/92 6/11/92

4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2)
6/17/92 6/11/92

4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3)
6/17/92 6/11/92

4a(73) (a) 4 (a) 4 January 1, 1993 (No. 1)
2/2/93 2/2/93

4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2)
2/2/93 2/2/93

4a(75) (a) 4 (a) 4 March 1, 1993
3/17/93 3/18/93

4a(76) (b) 4 (a) 4 May 1, 1993
5/27/93 5/28/93

4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2)
5/25/93 5/25/93

4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3)
5/25/93 5/25/93

4a(79) (b) 4 (b) 4 July 1, 1993
12/1/93 12/1/93

4a(80) (a) 4 (a) 4 August 1, 1993
8/3/93 8/3/93

4a(81) (b) 4 (b) 4 September 1, 1993
12/1/93 12/1/93

4a(82) (a) 4 (a) 4 September 1, 1993 (No. 2)
12/1/93 12/1/93

Exhibit Number
- ---------------------------------------------------
This Previous Filing
-----------------------------------------
Filing Commission Exchanges
4a(84) (a) 4 (a) 4 February 1, 1994
2/3/94 2/14/94

4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1)
3/15/94 3/16/94

4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2)
3/15/94 3/16/94

4a(87) (d) 4 (d) 4 May 1, 1994
11/8/94 12/2/94

4a(88) (d) 4 (d) 4 June 1, 1994
11/8/94 12/2/94

4a(89) (d) 4 (d) 4 August 1, 1994
11/8/94 12/2/94

4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1)
11/8/94 12/2/94

4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2)
11/8/94 12/2/94

4a(92) (a) 4 (a) 4 January 1, 1996 (No.1)
1/26/96 1/26/96

4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2)
1/26/96 1/26/96

4a(94) December 1, 1996

4b (h) 7(12) (c) 4c(1) Indenture between PSE&G and
2/18/81 Federal Trust Company, as
Trustee, (Midlantic National
Bank, Successor Trustee) dated
July 1, 1948, providing for 6%
Debenture Bonds due 1998

4c (l) 2c(8) (c) 4c(8) Indenture between PSE&G and
2/18/81 the Chase Manhattan Bank
(National Association), as
Trustee, dated August 15,1971,
providing for 7 3/4% Debenture
Bonds due 1996

4d (b) 4 (b) 4 Indenture of Trust between
12/1/93 12/1/93 PSE&G and The Chase Manhattan
Bank (National Association),
as Trustee,providing for
Secured Medium-Term Notes
dated July
1, 1993

4e(i) (b) (c) Indenture between PSE&G and
2/23/95 2/23/95 First Fidelity Bank, National
Association (now known as
First Union National Bank), as
Trustee, dated November 1,
1994, providing for Deferrable
Interest Subordinated
Debentures in Series

Exhibit Number
- ---------------------------------------------------
This Previous Filing
-----------------------------------------
Filing Commission Exchanges
4e(2) (a) 4b(5) (a) 4b(5) Supplemental Indenture between
PSE&G and First Fidelity Bank,
National Association (now
known as First Union National
Bank), as Trustee, dated
September 1, 1995 providing
for Deferrable Interest
Subordinated Debentures in
Series B

9 Inapplicable

10a(1) (c) 10c(1) (c) 10c(1) Directors' Deferred
3/17/82 3/19/82 Compensation Plan

10a(2) (c) 10c(2) (c) 10c(2) Officers' Deferred
3/17/82 3/19/82 Compensation Plan

2/25/94 3/1/94 Supplemental Benefits Plan for
Certain Employees

10a(3) (c) 10c(3) (c) 10c(3) Supplemental Death Benefits
3/17/82 3/19/82 Plan for officers

10a(4) (c) 10c(4) (c) 10c(4) Description of additional
3/17/82 3/19/82 retirement for certain
officers

(c) 10b(5) (c) 10b(5) Limited Supplemental Death
10a(5)(i) 3/31/83 4/8/83 Benefits and Retirement Plan

(c) 10a(5)(ii) (c) 10a(5)(ii) Limited Supplemental Benefits
10a(5)(ii) Plan for Certain Employees

(c) 10a(6) (c) 10a(6) Description of additional
10a(6)(i) 3/10/87 4/16/87 retirement benefits for
certain officers

(c) 10a(6)(1) (c) 10a(6)(1) Description of additional
10a(6)(ii) 3/30/90 3/30/90 retirement benefits for
certain officers

(c) 10a(6)(2) (c) 10a(6)(2) Description of additional
10a(6)(iii) 3/30/92 4/27/92 retirement benefit for a
certain officer

10a(7) (c) 10a(8) (c) 10a(8) Long-Term Incentive Plan
3/30/89 4/18/89

10a(8) (c) 10a(9) (c) 10a(9) Public Service Enterprise
3/30/89 4/18/89 Group Incorporated Pension
Plan for Outside Directors

10a(9) (c) 10a(9) (c) 10a(9) Letter Agreement with
2/10/93 2/11/93 E. James Ferland dated
April 16, 1986

10a(10) (c) 10a(12) (c) 10a(12) Letter Agreement with
2/10/93 2/11/93 Robert C. Murray dated
December 17, 1991

Exhibit Number
- ---------------------------------------------------
This Previous Filing
-----------------------------------------
Filing Commission Exchanges
10a(11) (c) 10a(13) (c) 10a(13) Letter Agreement with
2/26/94 3/9/94 Patricia A. Rado dated
March 24, 1993.

10a(12) (c) 10a(14) (c) 10a(14) Letter Agreement, as amended,
2/23/95 2/23/95 with Leon R. Eliason dated
September 14, 1994

10a(13) (d) 10a(15) (d) 10a(15) Letter Agreement with
8/14/95 8/14/95 Louis F. Storz dated
July 7, 1995

10a(14) (d) 10a(16) (d) 10a(16) Letter Agreement with
8/14/95 8/14/95 Elbert C. Simpson dated
May 31, 1995

10a(15) (d) 10a(17) (d) 10a(17) Letter Agreement with
11/14/95 11/14/95 Alfred C. Koeppe dated
August 23, 1995

10a(16) (e) 10a(18) (e) 10a(18) Directors' Stock Plan
2/22/96 2/22/96

10a(17) (e) 10a(19) (e) 10a(19) Mid Career Hire Supplemental
2/22/96 2/22/96 Retirement Plan

10a(18) (e) 10a(20) (e) 10a(20) Retirement Income
2/22/96 2/22/96 Reinstatement Plan

10a(19) Management Incentive
Compensation Plan

11 Inapplicable

12(a) Computation of Ratios of
Earnings to Fixed Charges

12(b) Computation of Ratios of
Earnings to Fixed Charges
Plus Preferred Stock Dividend
Requirements

13 Inapplicable

16 Inapplicable

19 Inapplicable

21 Inapplicable

23 Independent Auditors' Consent

27 Financial Data Schedule